Red Sea, red ink
Among blue chip companies that have taken a hit amid the Red Sea crisis brought about by Houthi rebel attacks on cargo liners is a giant liquor maker that was applauded for its aggressive inroads in Europe.
It appears the strategy has backfired for now.
Analysts said the liquor firm is trading at a 160.6 percent premium to the index which is “unwarranted given the likely cost challenges that the company is likely to be facing this year.”
The rerouting of ships will cause the company headaches for at least the first half of the year.
Diverting vessels away from the Suez Canal and towards the longer roundabout in the Cape of Good Hope is driving up logistical costs and raw material expenditures.
The Suez Canal is the only direct route for trade between Europe and Asia, and its removal from the equation has led to a surge in shipping and container costs.
It will also disrupt the availability of raw materials, forcing companies to order more inventory to offset the two-week increase in cargo journeys and costs.
This would negatively affect the cost of goods sold and pressure the margins of Europe-exposed companies downward.
Risky financial gambit
Another conglomerate that has placed a huge bet on energy has found itself at the epicenter of a brewing financial storm, underscored by its heavy reliance on power projects and a precarious financial strategy. Analysts said the company’s financial maneuvers, particularly its treatment of perpetual securities as equity rather than debt, have the potential of over-leverage and have obscured its financial risk, posing a grave threat to its business model.
The company’s plans to add substantial coal and LNG capacities to its portfolio are not just out of step with the global energy transition but also expose it to the severe volatility of fossil fuel markets, a vulnerability starkly highlighted by recent geopolitical events that have sent fuel prices soaring.
A financial expert says the heavy reliance on perpetual securities is a “masterclass in financial engineering that could have dire consequences.”
Classifying perpetual securities as equity presents a more robust balance sheet than is the case. This accounting maneuver allows the company to skirt the higher leverage ratios resulting from treating these instruments as debt, masking the true extent of its financial obligations and potentially misleading investors about the company’s financial health.