The sector continued to underperform, suffering from greater share price losses, compared against the already-weakened broader market. In fact, YTD, none of the counters’ price charts were positive, with the sector recording an average price decline of 23%. We still see earnings growth weakness to persist among logistics players, dragged by increased costs and competition, and as such, have opted to side-lined from the sub-sector for the short-to-mid-term. Container throughput for Port Klang are expected to grow in the region of low-single digit percentage for 2018, recovering from the low base in 2017, although this may not translate into earnings growth for WPRTS, as the group is likely to face higher taxes and finance costs. Spot petroleum charter rates are expected to be hugely subdued for 2018 on the back of prolonged tonnage oversupply, which could lead to immediate earnings weakness for MISC given that 45% of its petroleum portfolio is on spot charters, although the bulk of its earnings is still buoyed by long-term LNG charters. Overall, we maintain NEUTRAL on the sector given the lack of any meaningful rerating catalyst. However, we see some buying opportunity in MISC on further share price weakness. The group should be largely unaffected by recent geopolitical developments, while it is also a beneficiary of a weakening Ringgit environment. Meanwhile, we also find MMCCORP’s SoP-valuation to be compelling, underpinned by market cap of its listed associates MALAKOF and GASMSIA.

Continued underperformance sector-wide. Price performance for the sector continues to be greatly underwhelming, consecutively since 2HCH17, further worsened by the poor broader market sentiment of late. YTD against the broader market, the sector underperformed severely, recording an average decline of 23.6%, compared to 5.7% decline in the FBMKLCI and 16.4% decline in the FBMSC. In fact, none of our coverage stocks was in positive territory. Notable YTD decliners include CJCEN (- 37%), MMCCORP (-37%), GDEX (-28%), TNLOGIS (-25%), and POS (- 24%). Apart from the weak trading sentiment of late, we believe the overall price deterioration could be due to recent valuations correction in tandem with the continuing weakening earnings across the board, especially after the price rally following the launch of DFTZ last year, which propelled several logistics counter to trade at near-peak valuations.

Weak earnings growth to sustain among logistics players. We are currently advocating staying side-lined from the logistics sub-sector, with UNDEPERFORM calls on CJEN, GDEX and TNLOGIS. While the sub-sector could benefit from longer-term positives, such as: (i) continuous business expansion efforts, and (ii) increased volume growth due to the explosive growth of e-commerce, we still see weakness in earnings growth for the nearto-mid-term. This will be contributed by factors including: (i) the ever increasing competition and elevated operating costs, thus resulting in margins suppression, (ii) entrance of smaller players disrupting the industry, coupled with (iii) gestation costs from business expansions and ventures (e.g. CJCEN’s venture into parcel delivery, TNLOGIS’ venture into cross-border logistics). Additionally, should a wage hike be implemented by the government, this could result in further deterioration in earnings as staff costs represents one of the main opex component of the sub-sector.

2018 to see better container throughput in ports from last year. Port Klang’s container throughput saw an 8.2% drop YoY in container throughput for 1Q18. Comparatively, its closest peer Port of Singapore Authority (PSA) recorded a healthy throughput growth of 16.5% for the same quarter. While the comparison may be staggering, do take note that this was due to the reshuffling of alliance being effective in April last year. Nonetheless, we are expecting better throughput growths for the remainder of the year for Port Klang, at least on a YoY-basis. Port Klang is expected to end the year with container throughput growth of around low-single digit percentage range, recovering from the low base set last year. However, this may not directly translate to bottomline earnings growth for WPRTS, given that the group could face higher taxes and finance costs.

No sustainable recovery in shipping rates. Petroleum shipping spot rates are expected to face a more challenging year in 2018 on the back of prolonged tonnage oversupply in the market. Spot rates for petroleum VLCC charters dropped an average of around 70-80% YoY-Ytd, while Suezmax and Aframax dropped around c.40%. The deteriorated spot charter rates could lead to some immediate earnings weakness for MISC, given that 45% of its petroleum shipping portfolio are on sport charters as at end-1Q18. Nonetheless, the bulk of the group’s earnings is supported by long-term LNG charters.

Maintain NEUTRAL, given the lack of any major rerating catalysts within the sector. However, we do see some buying opportunity in MISC on further share price weakness. The group’s core businesses are relatively unaffected by recent geopolitical developments, while it is also a major beneficiary of a weakening Ringgit environment given that its main functional currency is the USD. Elsewhere, we also think MMCCORP’s SoP-valuation is compelling, underpinned by the market cap of its listed associates MALAKOF and GASMSIA, although we do note that investors’ sentiment for the stock has been unprecedentedly weak of late.

Source: Kenanga Research - 5 Jul 2018