We are upgrading our NEUTRAL rating on the Transport & Logistic sector to OVERWEIGHT on a stronger set of shipping data seen in 1Q14, suggesting positive sector outlook. On top of that, big cap MISC’s share price has consolidated to a more attractive level from its high of RM7.01 in March and we advise investors to accumulate this stock on further weakness. LNG shipping segment is the only underperformer within the shipping segment with negative growth seen in rates on both YoY and QoQ basis, possibly due to oversupply concerns. For sector picks, we continue to like MAYBULK as a proxy to the recovering dry bulk shipping market coupled with its net cash balance sheet position. We also like small cap HARBOUR for its exposure to SCORE initiative in Sarawak and property development in Bintulu to unlock its landbank value.

1Q14 results mostly in-line. Within our coverage universe, results for 1Q14 are broadly within our expectations with 5 out of 6 stocks within and the remaining one above. MAYBULK (OP; TP: RM2.53), delivered results that were above our expectations underpinned by: (i) better-thanexpected earnings from POSH, its 20.0%-owned associate, and (ii) robust dry bulk charter rates. We feel encouraged with the 1Q14 results and believe 2H14 could be better, driven by stronger seasonal trend and further improvement in the global trade on the back of stronger global economy.

Dry bulk and petroleum tankers improved again, LNG unexciting. In 1Q14, we see improvements in rates for both petroleum and dry bulk tankers especially on YoY basis due to improving demand outlook for global trade and narrowing demand and supply gap for the vessels on global basis. However, the improvement in rates are still not sufficient to bring the local shipping players to register profit for their shipping segments namely MISC (MP; TP: RM6.87) and MAYBULK. Nevertheless, we expect further rate improvements in 2H14 due to improved supply and demand outlook for the petroleum and dry bulk shipping segment. Things appear to be unexciting for the LNG vessel space, however, as decline in rates are seen on both QoQ and YoY basis, underpinned by oversupply concerns with heavy deliveries of LNG vessels expected over the next few years. We have a slightly negative outlook on the LNG segment in the medium-term owing to supply pressures in the future.

Upgrade to OVERWEIGHT. We have upgraded the Transport & Logistics sector to OVERWEIGHT from NEUTRAL due to: (i) improving shipping and logistics sector outlook, and (ii) share price weakness of big cap MISC which accounts for a substantial weighting of our coverage portfolio. Since three months ago, MISC’s share price has weakened by 9.3% to RM6.53 from its high of RM7.01 in March, taking its valuation to a more attractive level. We believe that investors should look out for further price weakness to gain exposure in the stock. We continue to like MAYBULK as we think that its share price weakness is unwarranted given its narrowing losses in the core dry bulk shipping division and relatively young fleet age. For small cap, we like HARBOUR (OP; TP: RM2.20) for its long-term earnings growth story driven by its maiden foray in property development in Bintulu and exposure to Sarawak logistics industry which may be driven by SCORE in the next few years.

Petroleum rates were strong, but more improvement is needed. Strong 4Q13 trend had somewhat weakened for VLCC tankers in 1Q14 on QoQ basis, possibly due to the high base caused by stronger-than-expected VLCC rates in 4Q13 driven by surge in demand for larger petroleum tankers and winter season. Despite the QoQ drop in rates, VLCC rates are still in positive territory in terms of YoY growth. Smaller vessels like Suezmaxes and Aframaxes also registered positive growth on both YoY and QoQ basis on higher demand for petroleum trade. For clean tankers namely LR1, LR2 & MR, rates are relatively flattish on QoQ basis with single-digit positive growth seen on YoY basis. Overall, we saw improving fundamentals in the petroleum tanker segment but further improvement in charter rates are needed if players in this segment were to return to the black.  

Bulking up. Growth was positive for all the dry bulk vessel ranges on both QoQ and YoY basis due to solid growth in bulk trade and narrowing of demand-supply gap for the bulk vessels. On top of that, we have also noticed that improvement in rates is more significant for bigger sized vessels like Capesizes with both 150,000dwt and 170,000dwt capacity with triple-digit growth in rates registered YoY. This is an indication of stronger improvement in demand for larger vessels which carry bulk cargoes like iron ore, bauxite and etc. We believe this is also due to the robust iron ore import demand from China. This augurs well for the bulk shipping industry in general but MAYBULK is expected to only benefit from improving trends in rates of smaller-sized vessels like Panamaxes and Handysizes which also saw YoY improvement in rates albeit at a slower pace than Capesizes. Moving forward, we expect further rates improvement in dry bulk segment as the gap between demand and supply narrows.

Losing steam. Rates for LNG tankers lost ground in 1Q14, registering negative growth both on QoQ and YoY basis underpinned by bearish outlook of the market towards the LNG segment, concerned over the potential oversupply of vessels in the coming years. According to Lloyd’s List, the global LNG fleet is expected to expand by 9% this year. Furthermore, there are currently more than 116 units of LNG vessels on order, which accounts for 32.0% of the current fleet in cubic metres, and this implies heavy vessel deliveries in the period during 2014-2017. This will put more pressure on LNG vessels rates in the medium-term despite the expected strong demand in the next few years especially from energy-hungry Asian countries.

Source: Kenanga