GCC companies demonstrate investor-appeal despite negative market fundamentals
Middle East port operators and shipping companies are proving to be attractive assets for investors to hold and are outperforming the global shipping industry that continues to suffer from slowing trade volumes.
The Russell 2000 Shipping Index, which tracks the share prices of global shipping firms, is 22 per cent down year-to-date. In contrast, shares of shipping firms in the Middle East like Dubai-based DP World, have risen throughout the year.
“This is the third year in a row where the shipping index has underperformed and that obviously causes problems with investors,” said Redwan Ahmed, equity analyst at the Egypt-headquartered EFG Hermes at a conference in Dubai.
Even more worrying for investors is the high level of volatility in the shipping sector. Earnings from very large crude carriers (VLCCs) passing through the Middle East continue to fluctuate widely, moving from ship owners earning $40,000 a day to just $5,000 a day within a few months.
“It is so so volatile, you don’t know how the company is going to perform, you don’t know how stocks are going to perform,” Ahmed said. At a macro-level, the shipping industry is far from attractive to investors. However, in contrast some of the large Middle East companies active in the industry are demonstrating strong growth potential.
The National Shipping Company of Saudi Arabia, Bahri, is one such company bucking the negative industry trends. Its share price is up 42 per cent, according to EFG-Hermes’ Ahmed. Its third quarter results released in November show net profit of SAR60.2m ($16m), increasing from SAR23.4m ($6.2m) in the same quarter in 2011. DP World’s stock has also performed well and its profits for the first half of 2012 have continued to grow compared to the same period last year.
“The industry fundamentals are negative, but the performance has been very positive. Despite difficulties, companies in the region have some competitive advantages…and they can perform,” said Ahmed.
Looking to the next two years, the industry will continue to struggle with the same problems of overcapacity, high insurance premiums, competition between shipping companies and low trade volumes.
The issue of overcapacity will be most relevant in the tanker and dry bulk sector, where demand for tankers is set to lag behind supply.
However, the larger Middle Eastern shipping and port companies are continuing to exhibit high levels of confidence by investing in port and fleet expansions and are well-positioned to weather the negative fundamentals affecting the industry.
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