We reiterate our NEUTRAL stance on the Shipping & Ports sector. The overall shipping sector is experiencing a down-cycle with the Baltic Dry Index slumping to a new low, but the saving grace is the strong performance of petroleum segment supported by limited vessel supply and high level of oil production. Meanwhile, local port operators are also bracing for tougher times with the slowdown in global economy, but they still possess the advantage of cheaper tariff as compared to peers with near-term earnings supported by the tariff hike. With no stimulating catalyst in sight, we maintain our neutral stance on the sector. Our top pick for the sector is MISC (OP; TP: RM10.64) with nearterm prospect supported by its petroleum division due to the favourable charter rates driven by countries stocking up oil inventory and limited fleet growth. Growth over the longer-term is backed by charter renewal of five LNG Puteri class carriers and five new LNG contracts.

3Q15 results post-mortem. Reviewing the most recently reported results, MISC‘s earnings were above expectations due to the betterthan- expected performance in petroleum segment. Growth was mainly driven by the continuous strong charter rates in the petroleum segment. Meanwhile, it is business as usual for the port operators in Port Klang (WPRTS and NCB) due to the rise in transshipment volume, which mitigated the weakness in import/export volume. On the other hand, BIPORT reported earnings that came below expectations due to the weaker-than-expected volume in its port.

Petroleum segment the bright spot The strong growing momentum in the petroleum charter rates sustained into 3Q15 with rates jumping by 63.8% to 172.3% on the back of limited vessel supply and the high level of oil production despite the weak oil prices. Meanwhile, the LNG segment experienced mild recovery in 3Q15 as compared to the previous quarter mainly owing to seasonality factors approaching the winter season, where the rates are usually the strongest for the year. However, the overall outlook is worrying for the shipping sector as the Baltic Dry Index dipped into record low in end-December 2015 following the disappointing China PMI data and a collapse in US ISM Manufacturing imports data.

Healthy growth recorded. As of 9M15, Port Klang recorded throughput growth of 9.0%. Breaking down to the port operators, WPRTS registered throughput growth of 8.6% to 6.7m TEUs in 9M15 while peer NCB managed to grow its throughput volume by 10.4% to 2.1m TEUs. Interestingly for NCB, its major shareholder MMCCORP has extended a mandatory general offer (MGO) during the quarter (mid-Oct 2015) to take NCB private in a deal that values NCB at RM2.1b. Thus, WPRTS will be the only listed port operators post the exercise. Overall, we remained neutral on the port operators as we think that the challenging global economy outlook and poor sentiment may also pressure the ports throughput volume on the downside. However, the impact might be mitigated by the cost advantage enjoyed by the local port operators as compared to the regional peers even after the tariff hike starting end-2015, while further supported by the expansion plan to boost the handling capacity.

Reiterate NEUTRAL on the Shipping & Ports sector. The overall shipping sector is experiencing a down-cycle with the Baltic Dry Index slumping to a new low, but the saving grace is the strong performance of petroleum segment supported by limited vessel supply and high level of oil production. Meanwhile, local port operators are also bracing for tougher times with the slowdown in global economy, but they hold the advantage of cheaper tariff as compared to peers with near-term earnings supported by the tariff hike. With no stimulating catalyst in sight, we maintain our neutral stance on the sector.

Our top pick for the sector is MISC (OP; TP: RM10.64) with a near-term prospect supported by the petroleum division due to the favourable charter rates driven by countries stocking up oil inventory and limited fleet growth. Growth over the longer-term is backed by charter renewal of five LNG Puteri class carriers and five new LNG contracts. Among our coverage, we are calling MARKET PERFORM on WPRTS with TP of RM4.52, based on DDM valuation. We advocate investors to ACCEPT OFFER for NCB with TP of RM4.40, in line with the offer price from MMCCORP as we think that the price is attractive and it offers the minority shareholders a chance to exit NCB, which is bracing for challenges in both port operations and logistics divisions. As for BIPORT, we maintain MARKET PERFORM with TP of RM6.81, based on DCF valuation. The port is currently experiencing slowdown in volume due to the weaker demand for LNG, but the longer-term prospect is underpinned by Samalaju Port. 

Source: Kenanga Research - 7 Jan 2016