We recently hosted a Shipping and Logistics Conference where six companies participated. These companies include a logistics company, two shipbuilders-cum-ship operators and three port operators. Response from the participants was encouraging with some of the corporate presenters meeting investors for the first time. Overall, the event gave the investment community a better picture of the under-appreciated logistics and shipping industry as a whole. We opine that there are some undervalued stocks namely SEALINK Sealink International Bhd (“SEALINK”, NOT RATED) and SYSCORP Shin Yang Shipping Corporation Bhd (“SYSCORP”, NOT RATED) trading at below average valuation. This event reaffirms our positive tone on the overall shipping & logistics industry. However, we are maintaining our NEUTRAL call on the sector due to an UNDERPERFORM call on MISC Bhd (“MISC”, UP; TP: RM6.87), which has the biggest market capitalization in the sector due to concerns with regards to its ageing LNG fleet with some going out of charter in the next two years. On the other hand, we have upgraded Integrax Berhad (“INTEGRA”, OP; TP: RM2.44) to OUTPERFORM from MARKET PERFORM without changes in TP due to its recent share price weakness.

Introducing shipping & logistics companies. In the event, we have a mixture of well-known big caps and the under-researched small caps generally overlooked by investors. These companies include Sealink International Bhd (“SEALINK”, NOT RATED), Freight Management Bhd (“FREIGHT”, NOT RATED), Shin Yang Shipping Corporation Bhd (“SYSCORP”, NOT RATED), Integrax Bhd (“INTEGRA”, OP; TP: RM2.44), Westports Holdings Bhd (“WPRTS”, OP; TP: RM2.91) and Bintulu Port Holdings Bhd (“BIPORT”, MP; TP: RM7.91). Interest was high from the attendees as evident from multiple questions posed to the corporate presenters throughout the sessions.

Our take from the conference. Post-conference, we gather a better understanding of the logistics industry in Malaysia and we generally feel that the logistics industry in Malaysia is under-appreciated by the investment community compared to other sectors. Apart from wellknow names such as MISC Bhd (“MISC”, UP; TP: RM6.87) and Malaysian Bulk Carriers Bhd (“MAYBULK”, OP; TP: RM2.53), we noticed that there are many smaller but good logistics companies, which focus on more resilient sub-segments like freight-forwarding, warehousing and other value-added logistics services, which are not as capital-intensive as shipping companies.

Stocks of interest. Sealink International Berhad (“SEALINK”, NOT RATED), for example, is seen to be conservatively valued at 8.8x forward PER on FY15 EPS. We arrived at a fair value with ranging 55-66sen using PER with a range of 10-12x. Shin Yang Shipping

Corporation Bhd (“SYSCORP”, NOT RATED) also appears to be attractively valued at 0.5x trailing PBV, which is considerably low given its large cap peers trade in excess of 1.0x PBV. While we still like Freight Management Bhd (“FREIGHT”, NOT RATED) business model and healthy balance sheet, we believe valuation is not so compelling at the moment given its currently trading at forward PER of 12.4x, which is slightly higher than FBSC Index (c. 11.0x). On the other hand, we feel encouraged after the afternoon session which covers three main port operators on Malaysia. INTEGRA, in particular, was interesting as Mr. Azman Shah Bin Mohd Yusof, who is an executive director of the company, brief investors on the Public-Private Partnership system between the company and the Perak State government which is slightly different in nature compared to port operators in Port Klang whereby a dedicated authority body is present.

Sector outlook. We reiterate our NEUTRAL call on the sector despite the positive tone as we believe the recovery in the sector is only for certain sub-segments and we believe volatility in the shipping sector will continue although better charter rates are expected for the year. Key re-rating 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. Our top picks for the sector are (i) MAYBULK for expected better dry bulk market this year and (ii) WPRTS for its efficient management coupled with expansion in capacity, which will in turn sustain the growth in throughput. We have also upgraded INTEGRA to OUTPERFORM from MARKET PERFORM due to its recent slight weakness in share price, thus it is a good opportunity for investors to accumulate the stock.

Source: Kenanga