Reiterate NEUTRAL on the Shipping & Ports sector. The stronger USD would not translate into higher volume for port operators as the location and efficiency of port are still the prioritized criteria ahead of the pricing. Thus, we do not see the lower port tariff on the back of weaker local currency to benefit local port operators significantly. Meanwhile, the subdued form of LNG charter rate has continued into 2015 on the back of growing vessel supply but the charter rate in petroleum segment strengthened further due to the stocking up activities thanks to low crude oil prices. All in, we maintain our neutral stance on the sector considering no catalyst is in our sight. We do not see near-term catalysts in the sector with the stronger performance in petroleum charter rate being offset by the weakness in LNG segment while the valuation of the ports had also peaked with timeline of the port tariff hike still remain unknown. Our top pick of the sector is BIPORT(OP; TP:RM8.08) as we like the company for its long term prospects on the back of increased economic activities in Sarawak thanks to Sarawak Corridor of Renewable Energy(SCORE) initiative.

Muted impact from weaker MYR. In view of the imminent implementation of GST in April 2015, we do think that the import volume to likely be negatively impacted considering the persistent weak consumer sentiment which will be further hampered by the GST while the stronger USD against MYR has translated into more expensive import shipments for the local consumption. On the flipside, the weaker ringgit is expected to drive the export sales as a result of the competitive advantage. All in all, we expect neutral impact from the strengtheing of USD against MYR considering the 50:50 ratio of the import/export containers mix in the local ports.

No advantage against regional peers. The stronger USD against our local currency also translates into cheaper port tariff for the local port operators as compared to regional peers particularly Singaporean peers. However, we do not think the competitive advantage can translate into higher volume or business for the port operators as the location and efficiency of port are still the criteria being prioritized when choosing the port for all the major shipping companies, ahead of the pricing. Thus, we do not see the lower port tariff on the back of weaker local currency to benefit local port operators significantly.

Still no materialisation of tariff hike. Despite the talks of Port Klang Authority rising the tariff ceiling for port operators based in Port Klang for years, the exact timeline of implementation or whether the tariff hike is in the pipeline still remain unknown. Nonetheless, we do not think that tariff ceiling upwards revision will 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.

LNG and Petroleum in contrasting forms. The subdued form of LNG charter rate continued into 2015, with February time charter (TC) rate slumping 18.2% MoM while the spot rate also recorded decline of 4.9% MoM on the back of growing vessel supply in the global LNG market. Meanwhile, the charter rate in petroleum segment strengthened further since the start of the year with January spot charter rates surging 30.3% to 46.2% across various vessel types, mainly due to the stocking up activities thanks to low crude oil prices. Charter rates in the chemical segment remained weak on account of slowing global economic growth. Dry bulk continued to underperform with 4Q14 rates sliding further as compared to the rates in the previous quarter. We believe that is due to the vessel oversupply situation in the global market as well as weak demand with the global economic slowdown.

Reiterate NEUTRAL on the Shipping & Ports sector. We maintain our neutral stance on the sector considering no catalyst is in our sight. We do not see near-term catalysts in the sector with the stronger performance in petroleum charter rate being offset by the weakness in LNG segment while the valuation of the ports had also peaked with timeline of the port tariff hike still remain unknown. Our top pick of the sector is BIPORT(OP; TP:RM8.08) as we like the company for its long term prospects on the back of increased economic activities in Sarawak thanks to Sarawak Corridor of Renewable Energy(SCORE) initiative.

Source: Kenanga Research - 6 Apr 2015