YTD-2018, the sector continued to underperform greatly against the broader market, with stocks within the sector’s coverage declining an average of 15.2% against the benchmark index’s gains of 3.8%. Overall, we remain cautious on the persistent risk in earnings growth seen within the logistics sector, resulting in a continued mismatch between corporate earnings and robust head-line economic growth figures. Meanwhile, Port Klang has suffered a 9% drop in container throughput in 2017 due to reshuffling of shipping alliances coupled with corporate restructuring activities among global shipping liners. This should pose as a new low base for WPRTS, with expected throughput growth of low single-digit percentage in 2018. Despite so, we expect upcoming 1Q18 numbers to show some YoY deterioration as the reshuffling of alliances was only effective in April 2017. Outlook for shipping rates continues to remain unexciting, and we see no foreseeable catalyst in MISC. All-in, we maintain our NEUTRAL call on the sector given the lack of meaningful rerating catalysts. Should one require exposure towards the sector, MMCCORP and CENTURY emerged as our preferred picks.

Continued underperformance. YTD-2018, the sector continued to underperform against the broader market with average losses of 15.2%, as compared to FBMKLCI’s gains of 3.8% and FBMSC’s losses of 12.7%. Notable mentions include MMCCORP (-29.5%), TNLOGIS (-25.7%), POS (-22.4%) and WPRTS (-16.6%). In fact, no counters within our sector coverage were positive. Consecutively, the sector has posted continuous price deterioration since 2HCY17. While this may be attributable to poor market sentiment of late, we believe the poor performance could also be partly a reaction against the sector’s continued overall earnings disappointment for the past several quarters. Recapping, the most recently ended 4QCY17 results season was also grossly disappointing, with 5 out of 8 of our sector coverage posting results below expectations. (Note our report’s cut-off date of 23rd March 2018.)

Persistent earnings growth risk among logistics players. We continue to observe a mismatch between corporate earnings within the sector and economic growth numbers. Recapping the most recently ended round of corporate results, companies within our sector’s coverage posted an average of 25% YoY decline in quarterly earnings, as compared to 4Q17 Malaysia GDP growth of 5.9%. This mismatch debunks the notion that the sector moves in tandem with overall economic growth, while also reflecting the challenging business environment amidst growing competitiveness. Moving forward, we believe the logistics sector to face persisting risk in earnings growth in the short-tomedium-term, arising from: (i) margins pressures due to increased competitiveness, affecting industry logistics players across the board, especially parcel delivery players (e.g. POS and GDEX) due to delivery rates competition, and (ii) elevated operating costs due to continued business expansions, affecting integrated logistics players (e.g. TNLOGIS and CENTURY). Likewise, ports operators could also see some earnings uncertainties following company-specific structural issues – i.e. MMCCORP’s earnings exposure towards the construction progress of KVMRT Line 2, and BIPORT’s operational commencement of Samalaju Industrial Port. Over the longer-term, possible game changers may come from: (i) companies maturing out of gestation phases from their current expansion plans, with new ventures turning meaningfully earnings accretive in the longer term, and (ii) potential consolidation between logistics players given the increasingly intensifying price competition.

Gradual recovery in ports throughput. In 2017, Port Klang’s total container throughput fell by 9% YoY. For WPRTS, transhipment container throughput dropped by a staggering 16%, partially masked by growth in gateway volumes by 10%, thus ending with lower total container throughput by 9% for the year at 9m TEUs. The drop in throughput during the year was mainly caused by: (i) the reshuffling of shipping alliances, combined with (ii) various corporate restructuring activities among global shipping liners. Moving forward, we believe 2017 should serve as a new low base for recovery, with 2018 expecting to see low single-digit percentage throughput growth, premised on: (i) continued growth in gateway volumes on the back of an expanding economy, and (ii) gradual recovery in transhipment volumes in a post-reshuffling business environment. With that said, however, we also do expect upcoming 1Q18 numbers to show some YoY deterioration for WPRTS, as the new shipping alliances were only effective April 2018. Meanwhile, BIPORT’s bottom-line earnings are also expected to be partially dragged by losses from Samalaju Industrial Port for the next 2-3 years. We see Samalaju Industrial Port to be a longer-term play, with its outlook closely dependent on the prospects of the Samalaju Industrial Park.

Unexciting outlook in shipping rates. Weakness in petroleum tanker charter rates is likely to prolong until 2H18 with the anticipation of lower new build deliveries. Meanwhile, LNG charter rates are also still under pressure due to overcapacity. Looking at our sole shipping coverage, MISC; it is looking for market recovery within the petroleum shipping space by 2H18, backed by sustainable demand and moderation of fleet growth. Current portfolio mix for petroleum and chemical vessels has improved to 54:46 term to spot, from 47:53 previously. 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.

Source: Kenanga Research - 5 Apr 2018