The sector continued to underperform the broader market, with quarterly share price declining an average of 5.3% against our local benchmark’s losses of 0.1%. Overall, we remain cautious on the sector’s persistent weakness in earnings growth, with corporate earnings thus far producing lessthan-spectacular performance than previously anticipated earlier last year, resulting in a mismatch between corporate earnings and head-line economic growth in the near-term. Port Klang suffered from poor throughput volumes throughout the year, adversely affected by macro-level headwinds among global shipping lines. However, we expect some recovery in the coming few years, at least earnings-wise, pegged to import-export volume growth coupled with a gradual stabilisation of the new business environment. Meanwhile, outlook for shipping rates remains unexciting, and could potentially lead to earnings risk for MISC. We maintain our NEUTRAL stance on the sector given the lack of rerating catalyst, with MMCCORP and CENTURY emerging as our preferred picks within this space. Conversely, we opt to stay side-lined from GDEX given lofty valuations.

Poor returns in 2017. The sector continued to underperform against the broader market. For the recently ended 4Q CY17 quarter, our sector saw an average share price decline of 5.3%, as compared to the FBMKLCI loss of 0.1%. YTD-wise, our sector averaged a 4.5% gain in share price, against a 6.8% gain in our local benchmark. Throughout the year, notable underperformers include MMCCORP (-18%), TNLOGIS (-15%) and WPRTS (-17%). (Note that cut-off date for our Quaterly Strategy Write-up was set on 15-Dec-2017.)

Earnings growth weakness. We believe the sector potentially faces looming risks in sustaining earnings growth moving forward. Despite early expectations of the local logistics industry to benefit from the booming ecommerce scene, earnings have shown weaker-than-expected growth thus far. Consequentially, this has led to a mismatch between corporate earnings growth and strong head-line economic numbers posted recently. We believe the mismatch are due to: (i) intensifying competitiveness coupled with increased operating costs from business expansions within the logistics space, affecting players such as GDEX (UP, TP: RM0.45), POS (MP, TP: RM5.10), CENTURY (OP, TP: RM1.25), and TNLOGIS (MP, TP: RM1.40), (ii) company-specific structural issues, such as construction progress of KVMRT Line 2 to greatly affect MMCCORP’s (OP, TP: RM2.85) bottom-line figures, and (iii) restructuring of global shipping liners to affect WPRTS’s (MP, TP: RM3.70) container volumes. With that said, we opine that earnings prospects are still positive over the longer-term as: (i) companies mature out of gestation phases from their current expansion plans, with new ventures to turn meaningfully earnings accretive in the longer future, (ii) possible consolidation between logistics players due to the intensifying competition, and (iii) normalisation of the changing business environments.

Port Klang seeing poor container throughput. Port Klang has seen 9M17 container throughput decline by 8% YoY (WPRTS - 8%, Northport -6%), largely due to reshuffling of global shipping alliances, coupled with restructuring activities among major global shipping liners. Following this, we have seen much of the throughput being shifted over to PSA from WPRTS during the year, with the Singaporean port seeing a tandem throughput growth of 8% for the year. With that said, however, we are expecting to see some improvements over the coming years, at least earnings-wise, underpinned by: (i) growing gateway container throughput on the back of our growing economy, which usually tends to fetch higher revenue per container as compared to transhipment containers, and (ii) stabilisation of a new business environment post-restructuring within the shipping line industry.

Unexciting outlook within tanker space. Overall, tanker rates are still on a declining trend, dragged by higher tanker fleet growth and surplus tonnage. Charter rates improved in October from 2017 low due to seasonal pickup as the winter season kicks in. Having said that, it has shown signs of weakness in the past two months due to weak cargo scheduling, easing regional demand and slowing crude export. Such weakness could persist as OPEC decided to extend the production cut till end of 2018. On the flip side, LNG spot rates have rebounded to its YTD high of >USD70k/day underpinned by improving flow of volumes, especially from Australia and US to Asian countries such as China and India as a result of colder-than-expected winter and domestic coal shortage. Thus, we see potential earnings risk in our sole shipping coverage, MISC (MP, TP: RM7.25) on weaker charter rates. Nevertheless, its firm balance sheet with net gearing of 0.2x and weak asset values allow MISC to embark on vessel expansion/replacement, opportunistic brown field replacement projects and shallow-water assets in the region.

Reiterate NEUTRAL. We reiterate our NEUTRAL stance on the sector given the lack of major rerating catalyst, with our preferred picks - (i) MMCCORP, being an SoP-valuation play, with a potential spin-off of its ports operations to act as a rerating factor, and (ii) CENTURY, being a longer-term e-commerce play, premised on its venture into last-mile delivery. Conversely, we opt to remain side-line from GDEX given its lofty valuations of 99x Forward PER after it gained 24% since our initial “OUTPERFORM” call on the stock.

Source: Kenanga Research - 5 Jan 2018