While we may see slight improvements in charter rates in 4Q16 due to the winter seasonality factor, the overall outlook remains unexciting. Petroleum charter rates are expected to remain weak, suggesting that 2016 may not see strong growth rates similar to 2015, but we expect charter rates to pick up slightly in 4Q16 due to the winter season, which are already accounted for in our estimates. LNG charter rates are not expected to improve before 2018 due to the strong supply of vessels entering the market, while demand remains stagnant. We have accounted for stronger throughput growth at WPRTS, and maintain moderate growth forecast for BIPORT. With a lack of any re-rating catalyst for the sector, we reiterate our NEUTRAL call. We maintain MISC as our preferred pick on the back of its healthy balance sheet and ability to acquire value-accretive distressed assets. Maintain OUTPERFORM for MISC (TP; RM8.19) and MARKET PERFORM for WPRTS (TP; RM4.49) and BIPORT (TP; RM7.22).

2Q16 results mostly within. Both ports under our coverage came in well within our expectations, similar to 1Q16. However, MISC came in below our and market’s expectations as we were too optimistic on the LNG and petroleum outlook, which had continued to trend lower during the quarter, similar to 1Q16. This led us to trim earnings for the second time in a row by 15-16% for FY16- 17E, after accounting for weaker LNG and petroleum freight rates. We made no changes to WPRTS and BIPORT earnings as their results were well within.

WPRTS throughput volume improving in FY16, likely from ad-hoc calls. In 2Q16, WPRTS saw a throughput growth of 11% to 4.9m TEUs, mainly from transhipment volume growth (+15%) on: (i) ad-hoc calls, (ii) additional volume during Ramadan, and (iii) higher volume prior to implementation of SOLAS, while management previously guided that these may be one-off instances and expected growth to remain at mid-single digit YoY, inline with our previous forecast of 4.1-4.2% in FY16-17E. However, going forward, WPRTS’ management expects improved volume, targeting 11% in FY16, likely from ad-hoc calls. Post accounting for higher volume growth to 10.5-4.2% in FY16-17E, we also lower our rates assumptions for transhipment and gateway revenue as our previous assumptions may have been too bullish, and increase FY16 effective tax rates to 17% (from 15%), but leave FY17 tax rates unchanged (at 15%) as capitalisation of capex may not be as quick to materialise in FY16. All in, we increase our earnings by 0.5-1.3% to RM646-693m in FY16-17E. BIPORT, on the other hand, faced a lower handling volume of LNG in 2Q16, general cargo and crude oil, which brought down revenue by 3% QoQ, while we estimate a modest 5-3% growth rate for BIPORT in FY16-17E.

Conservative outlook to remain for Petroleum charter rates as rates seem on course to continue its slow pace. Petroleum charter rates continued its downtrend (-9% YTD for 1 year TCE), after being the bright spot in FY15 as fleet growth continues to put downward pressure on rates. We believe key determinants for petroleum charter rates depend on: (i) oil demand, (ii) the effects of the seasonal cold snap, and (iii) strategy of owners to sell up or sell down the market. All in, we are not overly bullish on the petroleum charter rate outlook and expect rates to remain range bound for now with a seasonality pick-up in 4Q as winter season kicks in which we have accounted for in our estimates.

LNG charter rates to remain under pressure until 2018. The outlook remains gloomy for LNG rates as vessel oversupply issue is expected to persist up to 2018. To recap, supply is expected to increase further in 2016 from new Australian and US plants production, with cargo deliveries already fully contracted with 46 new new-builds expected to be delivered in 2016 while demand growth is lacklustre. There was some pick up in charter rates in Aug-16, +30% MoM for 1 year TCE and Spot rates due to tightening vessel availability in the Atlantic and Middle East. We believe the uptick in rates is unlikely to persist due to the oversupply issue, and as LNG charter rates remained weak up till July-16 (-23% YTD). We will continue to monitor LNG charter rates in coming months but make no changes to MISC’s earnings for now.

Baltic Dry Index surges ahead of winter. After tumbling to an all-time low of 290 in Feb-16 in the beginning of the year, the index is now at a much better footing, gaining by 91% to 912 as of our cut-off date (15th Sept-16) as its gains accelerated in the weeks of September. This is on the back of an ending summer holiday season, coupled with the approach of the winter, which we believe would increase shipping demand as commodities will be stockpiled ahead of winter before weather delays can impact shipping progress. Going forward, we expect the Baltic Dry Index (BDI) to remain volatile with a downside bias as a result of the strong rally while the BDI tends to retreat during 1Q during winter, and is strongest in 4Q, pre-winter.

We upgrade our TP for WPRTS slightly and maintain our calls and TP for MISC and BIPORT. We upgrade our TP slightly for WPRTS (MP; TP: RM 4.49) from RM4.41, but leave our call unchanged from the net positive effect of higher growth volume. Additionally, we reiterate our calls and TP for MISC (OP; TP: RM8.19) and BIPORT (MP; TP: RM7.22). At our current TPs, WPRTS’ implied Fwd. FY17E PER of 22.1x is close to its historical average at 21.0x (+0.3SD to its 3-year historical average). However, BIPORT and MISC’s implied Fwd. FY17E PERs are cheaper at -0.5SD to their 5-year historical average at 22.9x and 13.9x, respectively. We believe this is due to the fact that investors are not reacting hastily to forward valuations for MISC and BIPORT due to weak charter rates and the future of LNG operations, which may be weighing down on sentiment. As for current PERs, both port operators are traded above 21.0x and up to 23.4x over the past one year while MISC traded range bound between 12.8-15.7x.

Maintain NEUTRAL on the sector. The outlook for the sector remains unexciting as charter rates remain suppressed, while stronger demand at ports has already been accounted for. WPRTS may face a re-rating pending further confirmation on the strategies of the new shipping alliances by 4Q16, which would lend excitement to FY17 earnings. We continue to maintain an OUTPERFORM on MISC as we favour its healthy balance sheet allowing it to acquire value accretive distressed brownfield assets, especially in the oil and gas sector.

Source: Kenanga Research - 7 Oct 2016