While maintaining our NEUTRAL call on the sector, we have turned slightly positive on the outlook of the sector due to: (i) improving shipping rates, (ii) easing pressure of vessel supply, and (iii) relatively stronger expected economic fundamentals of the global economy in 2014 compared to 2013. We see great potential for a sector rerating in 1QCY14 once we get more assurances from shipping data and indicators. We expect to see more shipping vessel owners in the market to be return to the black in 2014 as shipping rates may potentially recover to breakeven levels. In the meantime, we had initiated coverage on Westports Holdings Bhd and Integrax Bhd in 4QCY13 with OUTPERFORM call for both companies. We like both port operators due to their: (i) resilience in earnings due to the non-cyclical nature of port businesses, (ii) efficient cost structures with double-digit margins sustained in the past few years, and (iii) sustainable long-term growth in top line driven by capacity expansion and organic throughput growth.

Results broadly within expectations. In 3QCY13, MISC (UP; TP: RM 5.06) delivered results which were broadly within our as well as consensus expectations. On the other hand, BIPORT’s (UP; TP: RM6.98) results came in slightly below expectations due to higher-than expected operating costs incurred on maintenance work done to the port infrastructure and higher amortization of leased concession.

Improving oil tanker market. International Energy Agency (IEA) expects the global oil demand to grow by 1.1m barrels per day in 2014 compared to increment of 1.0m barrels per day in 2013. On the supply side, tanker fleet is expected to slow with Aframax fleet reducing by 2% YoY and Suezmax shrinking by less than 1% YoY, according to Bloomberg Industries. This, in our opinion, may give some support to the charter rates of the segments mentioned. Survey shows that the charter rates for Aframaxes and Suezmaxes are expected to strengthen by 7% and 9% YoY, respectively. Tanker owners could see narrowing losses in 2014 with rates strengthening, but we believe that a sharper spike in rates is needed for ship owners to break even on their operations and we expect this to happen earliest in 2015.

Change in market dynamics. US oil imports is close to a 22-year low level currently due to the shale oil boom in the US oil and gas industry. In 2005, c.10.5m barrels per day of oil were imported into US but it had dropped 52.4% to 5.0m barrels per day in 2013, according to Teekay Tankers. We believe that this declining trend will continue in the long run as the shale oil technology develops further. This does not bode well for Aframax and Suezmax tankers in the long run as these tankers are used for the transport of oil for US imports. However, we opine that product tankers, which carry refined petroleum and vegetable oils, may benefit from this trend as US refined oil exports improves.

Potential beneficiaries. We believe that MISC and MAYBULK (NOT RATED) could benefit from this trend as the charter rates for them could rise to sustainable levels and they may see some of their shipping segments returning to the black in 2015. For now, we maintain our Neutral view on this segment pending more recovery data. We advocate investors to pay more attention to 1H14 shipping data for indicators that suggest a strong recovery in the market in 2H14 before putting money into this sector. Compared to the shipping industry, the ports are less affected by macro headwinds and are also less cyclical in nature. Despite macro headwinds in the shipping industry, the ports in Malaysia continue to register positive throughput growth consistently. We continue to like INTEGRA (OP; TP: RM 2.50) due to its robust long-term growth prospects in earnings.

If Fed tapers QE3 … We are of the view that the potential tapering of QE3 by the Fed in 1H14 would have a minimal impact to the stocks under our coverage in the ports and shipping sector. Shipping companies, for instance, may even benefit from the taper as higher credit costs will discourage ship owners to put on more orders for new ships, which will in turn hamper the recovery of rates in the shipping market. Direct impact of tapering on port operators would also be minimal in our opinion as the container throughput growth of cargoes handled in ports have been consistently positive historically with the exception being in 2009 when the credit crisis happened. We believe that ports will still continue to see positive throughput growth next year, which will be roughly in line with the expected global GDP growth rate in 2014 due to its strong correlation based on historical numbers.

Source: Kenanga