• Keep BUY, new DCF-derived MYR0.68 TP from MYR0.79, 18% upside. We believe FM Global Logistics will record softer YoY earnings growth in 1HFY24 amid expectations of a delayed trade recovery. Recovery should resume towards end-CY23, in tandem with the country’s and global trade recovery – primarily supported by the US and ASEAN economies. FM is trading at 8.3x FY24 P/E, which we think is undemanding, given its diverse business portfolio, strong cash flow generation, and c.6% FY24F yield.

• Ocean freight update. Overall vessel capacity (supply) continues to trend higher than demand amidst the slow cargo market and incoming newbuilding deliveries. Alphaliner reports that the period of Jan-Jul 2023 saw deliveries of 1.2m TEUs of new vessels entering the global fleet, with another 1.2m TEUs expected to be added by the end of the year. Container vessel orderbook projections indicate that 2024 will be a record year for deliveries due to the high number of new vessels ordered in the boom years of 2021 and 2022. The overcapacity of ocean vessels should continue to keep a lid on freight rates from rising.

• We expect a soft 1HFY24, in line with our cautious view on the country’s 1HCY23 trade performance. With export and import momentum slowing down in July and August, RHB Economics is now expecting a delayed recovery in Malaysia’s trade performance, with the possibility of the YoY exports contraction extending into 4QCY23. Our 1HFY24 earnings estimates now stand at MYR19.8m (-6% YoY), as China’s economy is expected to remain weak for the remainder of 2H23. Nevertheless, we anticipate a gradual improvement towards end-4Q23, supported by the strength of the US economy and recovery in regional economies (ASEAN).

• Domestic businesses to support international segment. Ocean freight forwarding remains the group’s core business (c.60% contribution to group revenue and GP). We expect the current market dynamics to continue to weigh down FM’s international business. Nevertheless, its domestic businesses such as third-party logistics (3PL), warehousing, and supporting services should continue to bolster the group’s earnings.

• Earnings revision. We lower our FY24F earnings by 4.6% based on the aforementioned factors. This brings our new DCF TP to MYR0.68, after incorporating a 6% ESG premium based on FM’s ESG score of 3.3 (above the country median of 3.0). We maintain our BUY call as FM’s current valuation of 8.3x is still attractive compared to its regional peers, while also offering a decent dividend yield of c.6%.

• Key risks include slower-than-expected volumes within the sea freight and air freight divisions, higher-than-expected opex, and slowdown in global trade activities.

Source: RHB Securities Research - 3 Oct 2023