With the lack of a re-rating catalyst for the sector, we reiterate our NEUTRAL call. Going into 2017, charter rates are expected to normalise from the higher rates witnessed throughout the winter season, while the medium-to-long-term outlook for LNG freight rates remains unexciting. As for ports, we expect prospects to remain stable going forward, with low-to-mid single-digit volume growth in FY17 on lacklustre outlook for the global economy. We initiated coverage on GDEX with an OUTPERFORM call and TP of RM1.97, while continuing to favour MMCCORP (OP; TP: RM2.70) for its stable ports business. We kept the calls for all our ports coverage unchanged, while MISC (MP; TP: RM7.97) was downgraded last quarter following its disappointing results.

3Q16 results mostly within expectations. Results for all three of our ports coverage (BIPORT, MMCCORP and WPRTS) were within expectations, while MISC (MP; TP: RM7.97) came in below, dragged by weaker-than-expected crude and production tanker rates, as well as lower earnings contribution from MHB (MP; TP: RM1.04). This led us to slash MISC’s FY16-17E earnings by 18-17%. Meanwhile, we adjusted WPRTS (MP; TP: RM4.49) FY16-17E earnings forecasts by -1.2%/1%, accounting for: (i) higher effective tax rates and lower gateway fee assumptions in FY16, and (ii) lower effective tax rates in FY17, while keeping the estimates for the rest of our ports coverage unchanged. Note that we have incorporated MMCCORP (OP; TP: RM2.70) into our ports coverage last quarter, from construction sector previously, as its ports and logistics segments have become the group’s main earnings driver.

Charter rates to normalise post winter season. As at our report cut-off date of 22 Dec 2016, tankers rates have improved from its 2016 low with seasonal pickup in 4Q as the winter season kicked in. VLCC spot rates have recovered to USD31.5k/day from its 2016 low of USD28.0k/day while Suezmax and Aframax are also hovering at USD22.0k/day and USD18.5/day, respectively; slightly higher than their lows of USD21.0k/day and USD17.0k/day. Despite the unpredictable winter weather which could result in further hike in spot rates, we believe the seasonal recovery is not sustainable and is likely to taper off post the winter season. YoY, tankers rates are still on a downtrend and we do not foresee strong catalysts to drive up the charter rates in the near term. On the other hand, the medium-long-term outlook for LNG freight rates remains unexciting given that c.90 vessels are slated for delivery within the next two years. We have seen some pick-up in charter rates in Nov 2016, at +15% MoM for spot rates backed by seasonality and shortage in spot vessels in the Atlantic. Having said that, we also believe the rates will normalise in the next few months post winter season. One silver lining for shipping is the recovery of the Baltic Dry Index seen during the year, from a record low of 290 points in February, to 928 points as at our report cut-off date, signalling a pick-up in rates and volumes for dry bulk shipping. However, moving into 2017, we view that the upside of the index could be capped by the oversupply of ships in the industry.

Ports to remain stable. Port counters under our coverage are expected to remain stable with unexciting trade volume due to lacklustre global economy growth going into 2017. As such, we expect low-to-mid single-digit volume growth in FY17. Local operators still possess the advantage of cheaper tariffs as compared to regional peers, with near-term earnings supported by the tariff hike. We are comfortable with our modest volume growth estimates pending further updates on shipping alliances strategies, which will gain more clarity by mid 1QCY17. Additionally, WPRTS is expediting its capex plans for CT9 and expects to complete Phase 1 of CT9 by Dec 2017, while plans for the completion of CT8 by mid-2017 are on track. This is to accommodate additional capacity post formation of the new alliances which start to take affect by April 2017. This will also allow WPRTS to utilise its Investment Tax Allowance (ITA) in FY17 which is valid for three years (2015-2017), thus lowering its tax rate to 18-12% (from 17-15%) which we have accounted for in our estimates previously.

Initiated coverage on GDEX, with OUTPERFORM call and DCF-derived TP of RM1.97 (WACC: 7.8%, TG: 5%). Last quarter, we initiated coverage on GDEX; expanding the sector’s coverage to include logistics. We believe GDEX offers a solid earnings growth story, riding on the booming e-commerce scene, with earnings projected to grow 16-31% for the next three FYs, while potential regional acquisitions will serve as a re-rating catalyst. Our TP implies a forward PER of 77x on FY17E, which we believe is justifiable, in view of: (i) GDEX’s strong earnings growth prospect, (ii) asset-light business model, giving rise to superior margins and profitability ratios over its peers, and (iii) it has always been trading at similar PER levels with 5-year average of 63x, reaching as high as 100x in June 2014.

Downgraded MISC to MARKET PERFORM, while maintaining calls for all our ports coverage. Last quarter, we downgraded our call on MISC to MARKET PERFORM, and lowered our TP to RM7.97 from RM8.19 previously, following a set of disappointing quarterly results. Meanwhile, calls for all of our ports coverage were maintained. However, we lowered our DDM-derived TP for BIPORT (MP; TP: RM6.72) after adjusting for a higher 10-year MGS of 4% (from 3.6% previously), closer to current levels post the MGS spike, based on a discount rate of 5%.

Maintain NEUTRAL on the sector. While we have OUTPERFORM calls for GDEX and MMCCORP, the remainder of the sector is suppressed by the unexciting shipping and ports outlook. Charter rates are expected to normalise, while stronger demand for ports may have already been priced in. We continue to favour MMCCORP as earnings have normalised due to the stable ports business which is now the Group’s main earnings driver and contributions from PDP for MRT2 and Sabah’s Pan Borneo, while earnings excitement will flow from the construction segment as well as land sale gains.

Source: Kenanga Research - 6 Jan 2017