Despite turning more positive, we are maintaining our NEUTRAL call on this sector because we believe the earnings risk for MISC, which accounts for a huge weighting in the sector, remains high given its ageing LNG fleet with some vessels going out of longterm charter in the next few months. Despite seeing stronger indications of recovery in the sector, we believe a sustainable recovery will only be seen in certain sub-segments given the diverse market conditions. In the last reporting season, we have two companies, (WPRTS and MISC) which beat our expectations; one came within (BIPORT) while another one underperformed (INTEGRA). In addition, we have also initiated coverage on MAYBULK which we like for its (i) robust net cash balance sheet position, (ii) being a proxy to the turnaround in the dry bulk sector, and (iii) exposure in the booming offshore marine business through POSH.

More encouraging 4Q13 results. Post 4Q13 results season, most of the companies under our coverage delivered more promising numbers compared to the previous quarters. Both MISC (UP; TP: RM6.87) and WPRTS (OP; TP: RM2.91) beat our expectations, underpinned by: (i) better-than-expected petroleum and chemical tanker rates and (ii) strong container throughput growth. BIPORT (MP; TP: RM7.91) came in within expectations while INTEGRA (MP; TP: RM2.44) underperformed due to lower-than-expected revenue per tonne achieved. Overall, we are positive about this trend and expect to see sustainable recovery of the sector in the medium-term.

Signs of recovery could be seen, but only for selective segments. The overall market sentiment for this sector has improved; however, we find that only some sub-segments of the shipping market are improving. In the petroleum tanker segment, for example, we only see significant improvements in the VLCC segment in particular. As mentioned in our previous strategy report, we believe that there is a fundamental shift in demand for bigger-sized tankers like VLCCs as compared to Aframaxes and Suezmaxes as emerging economies in the East namely China and India require more petroleum cargoes to be transported from the Middle East via long haul voyages. LNG vessel rates, on the other hand, continued to disappoint amid oversupply concerns in coming years.

Rising prominence of the East. We noticed a systemic change in global manufacturing and output pattern; shifting from the West to the East, especially China where demand for containerization is most prevalent. Therefore, we are of the view that in the long-term, the growth for trans-shipment container traffic will be driven mainly by intra-Asia trade while a slowdown may hit the Asia-Europe trades. This is evident given that the P3 alliance, an alliance of the world’s top three container liners, has been given the nod to proceed and is likely to start soon as early as June and P3 will reduce their vessel calls on certain ports to lower costs. However, on a net basis, we feel that the container port operators will not be hit significantly by this alliance, which could be more than offset by the fast-growing intra-Asia trade.

Go for bulk. In 1Q14, we initiated coverage on MAYBULK (OP; TP: RM2.53) with an OUTPERFORM call at a target price of RM2.53. Despite its robust share price performance in 2013, we feel there is still room for appreciation this year given its: (i) net cash balance sheet position despite being in a cyclical and asset-intensive shipping industry, (ii) still undemanding valuation (at 1.1x versus historical average of 1.3x), and (iii) sustainable recovery in the dry bulk shipping market with narrowing gap between supply and demand of bulk carriers. Meanwhile, MISC, which is another large-cap shipping counter under our coverage, remains an UNDERPERFORM with our major concerns being: (i) its maturing LNG charters that are expiring over the next two years, (ii) heavy newbuildings delivery in the global fleet market over the next two years, and (iii) substantial exposure to the Aframax segment which is out of favour in the medium-term.

Selective investments recommended. We have maintained our NEUTRAL call despite the positive tone on the sector as we believe the recovery in the sector is only for certain subsegments and we believe volatility in the shipping sector will continue although better charter rates are expected for the year. Therefore, we advocate investors to put their money only in certain sub-segments, which are expected to recover. Key rerating catalysts for the sector include: (i) better-than-expected Aframax tanker rates, (ii) rebound in the LNG vessel market and an earlier-than-expected recovery in the overall shipping market with our top picks for the sector being MAYBULK and WPRTS.

Source: Kenanga