We remain NEUTRAL on the Shipping & Ports sector as we think that the positive impact from petroleum charter rates resurgence will be offset by the weakness in LNG and chemical charter rates, while the slowing global economic growth will also limit the overall growth in the shipping industry. Meanwhile for the ports' operators, we think that sentiment could potentially be buoyed by a tariff hike but the actual financial impact would be limited due to the reasons mentioned. We favour the local logistics sector as we believe it is poised for re-rating thanks to resilient growth moving forward, with the industry projected to grow by CAGR of 11.2% over the next 5 years. Our top pick for the sector is MISC (OP; TP: RM9.35) with a near-term prospect supported by the petroleum division thanks to the favourable charter rates driven by countries stocking up oil inventory and limited fleet growth.

Mixed outlook in shipping. The outlook of the shipping industry is mixed with LNG still falling due to the lacklustre demand and overcapacity of vessels, while the situation is not expected to improve much with new vessels (8% of the current fleet) coming on-stream in 2015. Chemical charter rate also remained lacklustre on the back of weak demand. The saving grace was the petroleum charter, which continued the resurgence into 2015 while the momentum should be sustained in view of the steady demand on the back of low crude oil prices and slow new ships delivery.

Ports still awaiting catalysts. The much-anticipated tariff hike has not materialised so far, with the exact timeline and quantum still unknown at this juncture. However, we do not think that tariff ceiling upwards revision can 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 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 costs. However, we are not factoring in any potential impact from the tariff ceiling revision due to uncertainties in timing of implementation and quantum. Nonetheless, we still expect robust growth considering the sustainability of the Malaysian economy and also local ports to slightly benefit from the cheaper rate advantage as compared to the nearest competition in Singapore.

Opting for logistics play. While we are neutral on the mentioned core sectors above, we favour the local logistics sector as we believe the sector is poised for re-rating thanks to the resilient growth moving forward, with the industry projected to grow by CAGR of 11.2% over the next 5 years. The industry is backed by: (i) favourable customer mix with FMCG, industrial, E&E manufacturers as major customers, which can provide recurring business that is less vulnerable to the economy downturn, (ii) growing trend of outsourcing the logistics service due to the higher costs and the specialization advantage, (iii) aggressive expansion in the pipeline which suggests optimism, and (iv) the prospect of E-Commerce underpinning the longer-term future of the sector. Thus, we believe the logistics sector in Malaysia offers a good shelter in these volatile times, as well as providing good opportunity for investors to tap into the resilient growth of the sector.

Reiterate NEUTRAL on the Shipping & Ports sector. We think that the positives in petroleum charter rate resurgence will be offset by the weakness in LNG and chemical charter rates, while the slowing global economic growth will also limit the overall growth in the shipping industry. Meanwhile for the ports' operators, while we think that the sentiment could potentially be buoyed by the tariff hike, the actual financial impact would be limited due to the reasons mentioned above but the growth will be supported by the sustainability of the Malaysian economy. Our top pick of the sector is MISC (OP; TP:RM9.35) as we think that its near-term prospect should be supported by the petroleum division thanks to the favourable charter rates driven by countries stocking up oil inventory and limited fleet growth. Meanwhile, in the longer term, the earnings growth should be sustained by the construction and delivery of five new build LNG carriers starting 2H16. We also have OP call on BIPORT with TP of RM8.08 as we like its exposure to the rising economic activities in Sarawak driven by the Sarawak Corridor of Renewable Energy (SCORE) initiative. We maintain MP on NCB after upgrading our TP to RM3.65 (from RM3.04) as we value the company at 1.3x PBV (from 1.0x PBV) which is on par with its 5-year mean. This is following the optimistic market sentiment on the company after shareholder MMCORP increased its stake to 21%, rendering NCB as a relevant M&A play. As for WPRTS, we maintain our UP call with TP of RM3.29 as we think the valuation is lofty at 26.2x FY16E PER considering the earnings growth averaging just 3.6% over the next 2 years while yield is also not appealing at 2.6%. For the logistics sector, we have identified 4 quality logistics companies ie: (i) CENTURY (TB; FV:RM1.19) as we like its solid earnings growth averaging 19% over the next 2 years and decent dividend yield at 5%-6%, (ii) HARBOUR (TB: FV:RM3.15) on its strong earnings growth of 53.3% and 22.9%, respectively in the next 2 years on the back of its exposure to the rising economic activities in Sarawak, (iii) XINHWA (TB; FV:RM1.02) as it provides a good entry opportunity for investors to the exposure in the logistics sector in view of its undemanding valuation with near-term growth underpinned by capacity expansion, and (iv) TASCO (TB; FV:RM5.41) as the company is leveraging on its parent global network while also expanding its capacity to capture the rising demand of the logistics sector.

Source: Kenanga Research - 3 Jul 2015