This article first appeared in Capital, The Edge Malaysia Weekly on February 3, 2025 - February 9, 2025

THE recent ceasefire agreement between Israel and Hamas in Gaza is offering shippers some relief, putting downward pressure on freight rates that have been rising over the past year.

The Drewry World Container Index, which tracks the freight rates of 40-foot containers on eight major maritime lanes, had dropped by 43% to US$3,364 per FEU (forty-foot equivalent unit) on Jan 30 from a peak of US$5,937 per FEU recorded on July 18, 2024. This is 68% below the previous Covid-19 pandemic peak of US$10,377 per FEU in September 2021 but still 137% above the average of US$1,420 per FEU in 2019.

As tensions ease, things should turn positive for affected Malaysian firms, Kenanga Research says, although it foresees a gradual recovery as investors will monitor the sustainability of the ceasefire. The Israel-Hamas ceasefire has temporarily halted Houthi attacks in the Red Sea, which had led to increased freight costs and supply chain disruptions.

In a Jan 20 report, the research house says, “The diversion (of vessels) from the Suez Canal to the Cape of Good Hope (in South Africa) as well as port congestion (due to Houthi rebel attacks in the Red Sea) could gradually ease and thereby increase the frequency of calls shipping lines could make at Westports Holdings Bhd (KL:WPRTS) as well as other ports in the region.”

It has a “market perform” call on Westports but lifted its target price to RM4.40 from RM4.15 previously after the port operator’s results beat market expectations in the financial year ended Dec 31, 2024 (FY2024).

Westports’ FY2024 net profit rose 11% to RM779.43 million from RM699.58 million in the previous year on higher investment tax allowance (ITA) in 4QFY2024, record container volume, better yield gateway cargo and lower operating costs.

“Locally, the Malaysian government had in December 2023 banned Israeli-flagged cargo ships from docking locally, but as Westports predominantly serves the intra-Asia route, it was not heavily burdened by the development. Even so, the port operator is likely to benefit most indirectly from better scheduling and a reduction in vessel bunching, which could remove schedule unpredictability and the occasional accompanying congestion,” says Kenanga Research.

The downward pressure on freight rates is likely to persist, says Maybank Investment Bank (Maybank IB).

It notes that as vessels gradually return to the Red Sea after the ceasefire between Israel and Hamas, expectations are that sailing distances will eventually normalise back to pre-crisis levels.

However, it sees shipping lines facing yet another challenge — new capacity that had been easily absorbed during the partial closure of the Suez Canal will now be released as travelling times go back to normal.

“Coupled with record deliveries of new vessels, there will likely be overcapacity in the market and it is estimated that the industry would have to remove about 1.8 million TEUs (20-foot equivalent units) of containers just to maintain the status quo. This would then contribute further to falling freight rates,” Maybank IB says in a Jan 21 report. It has a “neutral” call on the Malaysian port and logistics sector.

The research house adds that the new shipping alliances taking effect on Feb 1 would likely contribute to potential delays and result in congestion at local ports. Nevertheless, Maybank IB points out that the impact is expected to be less severe than that from the complete rerouting in late 2023 and early 2024, when shipping liners avoided the Suez route due to safety concerns. “A staged return with better planning should minimise disruptions. Hence, we do not expect major disruptions at local ports, that is, Westports, while Swift Haulage Bhd’s (KL:SWIFT) operations were unaffected by last year’s port congestion.”

The research house is maintaining a “buy” recommendation on Westports with a target price of RM5.38, supported by sustained intra-Asia trade demand and rising foreign direct investments and domestic direct investments in Malaysia, which drive higher tariffs and gateway container volume growth.

In a Jan 24 note to clients, CGS International says Westports expects single-digit container volume growth in FY2025. It handled a new all-time container volume high of 10.98 million TEUs last year, surpassing its previous record of 10.88 million TEUs set in 2023.

“We have assumed growth of 3.7% year on year, comprising +2% transshipment and +6% gateway container volume. The big uncertainty is the effect of any potential US import tariffs: heavy tariffs on Chinese exports may accelerate the China-Plus-One strategy and push the Chinese to export more to Malaysia (both of which could benefit Westports’ container volume) but Malaysian intermediate good exports to China could be hurt by the effects of a slowdown in Chinese exports to the US,” says CGS International. It has a “hold” call on Westports and a target price of RM4.42.

“Meanwhile, if the US imposes tariffs on Asean goods, Malaysian exports could feel the heat. Domestically, we expect Westports to enjoy better newsflow. According to a social media post by the Association of Malaysian Hauliers, the Port Klang Authority has proposed a 30% container tariff hike; we expect this to take effect this year although, referencing the last tariff hike 10 years ago, we think that the hike may be split into two tranches three years apart. We have pencilled in a 15% hike from Sept 1, 2025, followed by a 13% hike from Sept 1, 2028, for a cumulative 30%,” CGS International adds.

The upside risk to CGS International’s “hold” call on Westports is if the tariff hikes are larger and take place faster than its assumptions. The downside risks are delays and cost overruns in the Westports 2 expansion project, which is about to commence land reclamation works in 1Q2025, and if US President Donald Trump’s tariffs take a heavy toll on global trade.

According to Bloomberg data, Westports has a consensus target price of RM4.77 per share — a 3% upside potential from last Tuesday’s closing price of RM4.63. The counter has risen 22% in the last 12 months and is currently valued at RM15.79 billion.

In a Jan 14 report, RHB Research notes that geopolitical risks persist, taking the view that ocean freight rates are likely to stay above pre-pandemic levels in the near term, mainly due to potential frontloading in anticipation of US tariffs, Lunar New Year-related demand, political unrest in the Middle East and Ukraine, as well as a potential strike at the US East and Gulf Coast ports. These disruptions could also result in an ocean-to-air shift, putting capacity pressure on the air freight market and lifting rates.

Thus, it is leaning towards logistics players like Tasco Bhd (KL:TASCO) amid elevated freight rates as a result of route disruptions across the globe.

RHB Research is also maintaining a “neutral” view on the transport sector due to a dearth of fresh catalysts. It says sector heavyweights under its coverage are fairly valued, noting that Westports’ share price had risen about 30% in 2024. In the logistics sector, it is more optimistic about Tasco due to its prospects for the year ahead on the back of an improved freight forwarding segment, volume recovery, contribution from new warehouses and available tax credits from the integrated logistics service incentive. It has a “buy” call on the stock and a target price of RM1.12, which implies a 60% upside potential from last Tuesday’s closing price of 70 sen.

Tasco saw its net profit halve to RM15.14 million in its six months ended Sept 30, 2024 (1HFY2025) from RM30.07 million a year earlier due to a weakness in supply chain solutions, contract logistics and cold supply chain businesses. This was despite port strikes and congestion as well as shipping disruptions in the Red Sea, pushing the air and ocean freight divisions to record higher pre-tax profits.

But Tasco deputy group CEO Tan Kim Yong sees signs of stability across all business segments going into 2HFY2025.

“I don’t see the company reporting a sharp drop (in its earnings) for FY2025 (ending March 31, 2025) and onwards. Yes, there will be ups and downs depending on the overall economy amid uncertainty surrounding Trump’s trade policies. We have to see what he is doing and how that will affect us,” Tan tells The Edge, adding that the situation in the Red Sea remains fraught with risks for international shipping.

Tan expects the company’s FY2025 growth to be fuelled by its warehousing business, with contributions from new warehouses and the air and ocean freight divisions on the back of strong demand from certain key customers.

He adds that Tasco still expects its revenue to exceed the RM1 billion mark in FY2025, notwithstanding the challenges of the year. The company’s revenue had surpassed the RM1 billion mark for three years in a row, generating RM1.48 billion in FY2022, RM1.61 billion in FY2023 and RM1.07 billion in FY2024. For 1HFY2025, the company’s revenue increased 4% to RM545.67 million from RM526.83 million a year earlier.

S&P Global Market Intelligence says while container shipping rates have dipped, the Israel-Hamas ceasefire may not lead to a significant drop as the Houthis are likely to continue to attack ships in the Red Sea, albeit at a lower rate.

“The Houthis claimed in their statement on Jan 19 that attacks on Israeli-owned vessels would also cease if all three proposed phases of the ceasefire were implemented, which currently include the Israel Defence Force’s (IDF) complete withdrawal from the Gaza-Egyptian border, declaration of the conclusion of hostilities and discussions about Gaza’s post-war arrangements. However, it is very unlikely that the IDF will withdraw from Gaza entirely and access is likely to remain heavily restricted. The Houthis are likely to cite this as justification for continued missile and unmanned aerial vehicle attacks against Israel,” S&P Global says in a Jan 21 analysis.

It also points to major container shipping lines’ latest schedules, suggesting they expect to continue to use the Cape of Good Hope routes as they have since late December 2023 for much of the remainder of 2025.

S&P Global believes the main economic impact of the Red Sea routes’ “reopening” would be to return capacity to the container shipping system, equivalent to around 6% to 8% of existing vessels due to faster sailing. At the same time, new vessels adding nearly 24% of new capacity are coming, launching over the next three years.

“Looking ahead, global container trade is expected to rise by just 2.6% in 2025, while new vessels equivalent to 24% of new capacity will come into service in the next three years. There are further uncertainties for logistics decision-makers from new shipping network designs, environmental rules and other regulations, while container lines have several tools to maintain container rate discipline,” it adds.

As for dry bulk shipping rates, Hubline Bhd (KL:HUBLINE) group managing director and executive director Dennis Ling Li Kuang says they are “a bit soft at the moment due to the seasonal and festive seasons. The outlook is uncertain.”

The benchmark Baltic Dry Index, which tracks rates for ships carrying dry bulk commodities, fell to a 23-month low of 715 points on Jan 30, amid seasonal lower demand ahead of the Chinese New Year holidays.

Swift Haulage executive director and group CEO Loo Yong Hui expects container haulage volumes to experience a modest increase this year, primarily driven by improved local consumption. This growth will be supported by higher minimum wages, increased civil service salaries and a resurgence in tourism activities, all of which are expected to stimulate domestic demand and positively impact logistics and transport activities.

However, there are risks to this growth outlook. If the government removes the subsidy on RON 95 fuel, this could dampen growth, he notes.

While volumes are expected to rise, Loo says haulage rates are likely to remain as cost pressures from industrial customers, particularly due to wage increases, are expected to limit the ability to pass on higher costs to customers.

“Consequently, margins in the haulage business will remain under pressure, with profit margins likely to remain the same in the near term,” he tells The Edge.

“For the land transport business, we anticipate similar dynamics, with modest volume growth being offset by rising operational costs, including wages.”

Loo says the warehousing industry is expected to evolve this year, driven by changing customer needs and market dynamics. “Customers are looking to consolidate their warehousing operations to reduce manpower costs and improve efficiency. As a result, there is growing demand for larger-scale warehouses in strategic locations that can support high volumes.”

Given the simultaneous increase in both demand and supply, Swift Haulage is anticipating that warehousing rates will remain stable. This balance ensures that companies can access modern, efficient facilities without significant price hikes, says Loo.

Swift Haulage’s net profit fell 27% to RM35.25 million in the nine months ended Sept 30, 2024, from RM48.25 million a year earlier, due to start-up costs from a new warehouse and loss of operational scale arising from global shipping disruption.

Of the five analysts covering Swift Haulage, one has a “buy” rating and four a “hold” with an average target price of 51 sen, which indicates an upside potential of 15% from last Tuesday’s closing price of 44.5 sen. The stock has fallen 26% over the last 12 months.

Meanwhile, analysts see Swift Haulage benefiting from the Johor-Singapore Special Economic Zone (JS-SEZ) initiative from its involvement in container haulage and freight forwarding operations in Johor.

“Swift Haulage holds a market share of around 5% based on the number of containers it hauled at both the Port of Tanjung Pelepas and Johor Port. The company began operating short-haul transport for petroleum products in Singapore in 2022, marking its first venture into the market. It has also previously considered entering the Singapore distribution market due to the proximity of its Tebrau warehouse to the Tuas Second Link,” MIDF Research says in a Jan 7 report. The local research house has a “neutral” call on the stock and a target price of 46 sen.

Loo notes that as more companies relocate their warehousing operations from Singapore to Johor to optimise costs and take advantage of the JS-SEZ’s economic incentives, Swift Haulage expects to see increased demand for both warehousing and cross-border transport services. “Swift Haulage is well positioned to capture this growing business by offering comprehensive logistics solutions, including strategically located warehouses and seamless cross-border movement services,” he adds.

Swift Haulage’s Tebrau warehouse in Johor Bahru is currently operating at 70% capacity. Currently, the company has a total warehousing capacity of 1.7 million sq ft in the country.

“As part of our strategic expansion into the cold chain logistics market in Peninsular Malaysia, we are adding 100,000 sq ft of capacity dedicated to cold storage by the end of this year. This investment positions us to cater to the growing demand for temperature-controlled logistics solutions, driven by sectors such as food and pharmaceuticals.

“In addition, our associate Global Vision Logistics Sdn Bhd is on track to complete the Shah Alam International Logistics Hub by November this year. Swift Haulage has plans to take up an additional 400,000 sq ft of ambient warehouse space in this project. This will increase our warehouse capacity to 2.2 million sq ft by the end of the year,” says Loo. 

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