We have downgraded our sector call from OVERWEIGHT to NEUTRAL on the back of: (i) higher uncertainties in the global shipping market despite more manageable vessel supply due to an expected weak trade demand in 2015, (ii) headwinds in port industry on possible hiccups caused by GST implementation, and (iii) less attractive valuations of big-cap shipping and port players under our coverage due to strong share price YTD performance. One potential positive catalyst is the impending container tariff ceiling hike in Port Klang, but we have not factored into our forecast due to uncertainties in timing and quantum of the increase. Volatility continued to persist in the shipping segments with the Petroleum tanker segment remaining strong while Dry

Bulk segment was weaker-than-expected due to the absence of iron ore restocking by China on a similar scale in 2013. At the moment, we prefer small to mid-cap stocks like SURIA (OP; TP: RM3.41) and HARBOUR (OP; TP: RM2.20) on the back of their growth stories driven by Jesselton Quay development in Kota Kinabalu port and SCORE initiative by the Sarawak government, respectively. Meanwhile, we have downgraded WPRTS (UP; TP: RM3.13) from OP to UP with TP maintained.

Port industry unexciting amid GST implementation, but weaker MYR could bring positive effects. Upon the expected implementation of GST in 2015, import activity is poised to be weaker due to knee-jerk reaction by local consumers. While demand is expected to normalise months after the implementation, we expect growth in container throughput handled by port operators to be mediocre in 2015. Meanwhile, further weakening of MYR could have some positive impact on Export throughput which will partially mitigate the anticipated decline in Import throughput.

Port Klang impending tariff hike not factored in yet. Talks of Port Klang Authority rising the tariff ceiling for port operators based in Port Klang has been around for years and until now timing of implementation remains unknown. The tariff ceiling upwards revision will not translate into a linear positive increment in revenue for the port operators as some of them may be charging their core clients at lower rates than the ceiling tariff. We expect port operators with higher Import/Export throughout weightage to benefit more from the tariff ceiling increase as Import/Export cargoes are less price elastic as compared to transhipment throughput. We believe a tariff ceiling hike is imminent despite timing uncertainty given that the tariff ceiling has not been lifted for 10 years despite rising fuel and electricity cost. However, we are not factoring in any potential impact from the tariff ceiling revision due to uncertainties in timing of implementation and quantum of the increase.

More volatility in the shipping segment. Petroleum tanker segment extended their strong performance as slower vessel supply growth reduced the surplus gap in the market. Meanwhile, dry bulk shipping rates have fared worse than expected with bigger sized vessels taking a bigger hit as China did not restock iron ore inventory aggressively in contrast with the corresponding period last year, inducing lesser demand for dry bulk trade. Chemical tankers remained flattish while LNG tanker segment’s weak performances persisted amid impending supply overhang of vessels. While we anticipate a better year for the shipping industry overall as vessel supply slows, volatility in rates are expected to persist and sustainability of increase in rates hinges on the growth in demand for global trade, which remains uncertain in the meantime amid slowing growth in China economy and uncertainties in US and European economies.

Downgrade sector to NEUTRAL, mid-small cap still preferred. Since our previous sector report, WPRTS has posted robust capital gains to date (WPRTS: 30.8%), bringing its valuations to a less attractive level. Therefore, given the less attractive valuations and more uncertainties expected in both the shipping and port industry for the year ahead, we have downgraded our sector call from OVERWEIGHT to NEUTRAL. For the stocks under our coverage, we have downgraded WPRTS from OP to UP with TP maintained. For now, we prefer small and mid-cap counters in our logistics universe namely SURIA (OP; TP: RM3.41) and HARBOUR (OP; TP: RM2.20) underpinned by expected positive impact from Jesselton Quay and SCORE initiative, respectively coupled by their attractive valuations, which are standing at FY15 PER of 10.1x and 3.9x respectively.

Source: Kenanga