We reiterate our NEUTRAL stance on the Shipping & Ports sector. While we reckon that the petroleum rates may recover in coming quarters, we are more worried on the downsides due to the sluggish LNG and subdued chemical segments. The general shipping outlook is also lethargic as evidenced by the weak Baltic Dry Index. Meanwhile, we think that the positive impact of the port tariff hike could have been priced-in and port operators are bracing themselves for challenging times ahead in anticipation of slower trade growth as well as dampened business sentiment on the back of a bearish global economy outlook. Our top pick for the sector is MISC (OP; TP: RM9.26) with a near-term prospect supported by the petroleum division thanks to the favourable charter rates driven by: (i) countries stocking up oil inventory, and (ii) limited fleet growth. We also do not discount the possibility of a special dividend after the Group concludes the deal to dispose its 50%-owned VTTI with proceeds amounting to USD830m (RM3.6b or 8.2 sen/share).

Post-mortem on 2Q15 results. All of the companies under our coverage posted results that were within expectations with the exception of BIPORT due to lower volume registered on the back of weakness in LNG. The only shipping company under our coverage, MISC recorded a solid set of results with 1H15 net profit growing 48.9%, mainly attributable to the sustained recovery in the petroleum segment. Meanwhile, the port operator duo in Port Klang, namely WPRTS and NCB delivered performances that were within our expectations thanks to the healthy throughput growth.

Petroleum slowed down seasonality. The momentum of the charter rates in the petroleum segment has taken a breather, which is believed to be caused by the closures of refineries for scheduled maintenance in the summer months. However, rates are expected to rise with the approaching peak season in 4Q. Meanwhile, LNG rates remained subdued on the back of sluggish global LNG demand and oversupply in vessels. Chemical rates were flattish due to the balance of volumes and tonnages while the dry bulk market was also weak with the lower demand for capsize vessels.

Port Klang tariff hike materialized. The much-anticipated tariff hike in Port Klang was finally announced in early August 2015. The hike quantum of 15% did not surprise us on the upside, but we are positive on the announcement as it eliminates the uncertainty after prolonged speculations and we do not expect the hike to dent Port Klang’s competitiveness. However, we are not overly upbeat on the sector despite the tariff hike as we are wary of potentially slower trade growth in Malaysia, which is forecasted to slow down to 2.4% in 2015 from 5.9% in 2014. Besides, the weaker overall global economy outlook and the poor sentiment may also affect the throughput growth in ports.

Reiterate NEUTRAL on the Shipping & Ports sector. While we think that the petroleum rates might recover in coming quarters, we are wary on the downsides in view of the sluggish LNG and subdued chemical segments. The general shipping outlook is also not bullish as evidenced by the weak form of Baltic Dry Index. Meanwhile, we think that the positive impact of the port tariff hike could have been priced in and port operators are bracing themselves for challenging times ahead in anticipation of the slower trade growth as well as the dampened business sentiment on the back of bearish global economy outlook. Our top pick of the sector is MISC (OP; TP:RM9.26) as we think that its the near-term prospects should be supported by the petroleum division thanks to the favourable charter rates driven by: (i) countries stocking up oil inventory, and (ii) limited fleet growth. Meanwhile, in the longer term, the earnings growth should be sustained by the delivery of five new-build LNG carriers starting 2H16. We also do not discount the possibility of a special dividend after the Group concludes the deal to dispose its 50%-owned VTTI with proceeds amounting to USD830m (RM3.6b or 8.2 sen/share). 

Source: Kenanga Research - 7 Oct 2015