The sector has continued to underperform the broader market. In fact, YTD, none of the counters within our coverage have registered any share price appreciation, but instead posted an average decline of 26.5%. For courier services players, earnings delivery is still the key as they continue to operate within a margin compressive environment amidst growing pricing competition. Meanwhile, we believe Port Klang’s container throughput has already bottomed out, after recording a 1H18 decline of 1.4% due to tail-end residual effects of M&A and alliances reshuffling activities among global shipping lines. Likewise, the U.S.-China trade war is expected to have a minimal impact, at least in the immediate-term, as we believe it will mostly affect transpacific shipping routes. All-in, we maintain our container throughput growth forecasts for 2018-2019 at 3-5%. Separately, we still see no meaningful or sustainable recovery in freight shipping rates, with new-build deliveries remaining strong, while accelerated scrapping activities for tankers of late are still largely saddled by the high number of deliveries seen over the past two years. Maintain NEUTRAL on the sector, given the lack of any re-rating catalyst, with MMCCORP as our sole OUTPERFORM call on the back of its compelling SoP-valuation, underpinned by the value of its listed associates GASMSIA and MALAKOF.

Continued underperformance sector-wide. Share price returns for the sector continued to underperform against the broader market. YTD, our sector coverage averaged losses of 26.5%, versus FBMKLCI gains of 3.1%. For the 3QCY18 quarter, our sector coverage averaged returns of 0.2% - a first positive after several consecutive quarters of losses, but still pale in comparison to FBMKLCI’s gain of 7%. Notable names for the quarter include: (i) POS (UP, TP: 3.10), declining 8.5% during the quarter, following its hugely devastating 1Q19 results, while (ii) WPRTS (MP, TP: 3.75) managed to register gains of 9.7% on the back of its neutral 2Q18 results coupled with further developments on its rate-hike (effective March 2019) and CT10-19 expansions (land acquisition). Note our strategy cut-off date of 21 Sep 2018.

Persistent weak earnings from logistics players. Concerns over earnings delivery continued to be a theme among logistics players. Particularly, growing competition within the industry, especially in the parcel delivery space competing for e-commerce volumes, has led to pricing pressures; thus, resulting in compressed margins. POS suffered huge earnings deterioration in its latest 1Q19, down by 91% YoY, led by huge margins deterioration in its courier segment coupled with widening losses in postal services. Similarly, GDEX (UP, TP: 0.350) also saw its FY18 earnings declining 36% on margin compression coupled with expiration of tax incentives, while earnings outlook for CJCEN (MP, TP: 0.750) (1H18 core earnings -31% YoY) also remains uncertain given start-up losses in its courier services venture and lower warehouse utilisation. Overall, we opt to remain sidelined from the sub-sector for now until we see clearer signs of earnings recovery.

Positive throughput growth for Port Klang moving forward. For 1H18, Port Klang saw its container throughput dropping 1.4% YoY to 5.9m TEUs due to tail-end residual effects from M&A activities and alliances reshuffling among global shipping liners that took place last year. That said, we believe container throughput has now bottomed out, and are expecting positive growth moving forward, driven by organic economic growth coupled with the low-base effect. Moreover, we see very little immediate-term impact from U.S.-China trade war as it should mostly only affect transpacific shipment routes. All-in, we are maintaining our view of around 3-5% container throughput growth for 2018-19.

No sustainable recovery in shipping rates. While freight rates did see some mild upticks in recent months in anticipation of a seasonally stronger winter season, overall, we still see no major catalyst for a sustainable recovery. New-build deliveries continue to remain strong, while accelerated scrapping activities for tankers of late are still largely saddled by the high number of deliveries seen over the past two years. As such, MISC (MP, TP: 6.65) is expected to see weaker earnings for FY18-20, given the suppressed charter rates.

Maintain NEUTRAL, given the lack of any major rerating catalysts within the sector. Within our coverage, our sole OUTPERFORM call is MMCCORP (OP, TP: 1.95) due to its compelling SoP-valuation underpinned by market cap of its listed associates GASMSIA (MP, TP: 3.50) and MALAKOF (OP, TP: 1.20), although trading sentiment for the share has been weak for some time. Meanwhile, we are opting to stay sidelined for the rest of the sector as earnings delivery remains a risk.

Source: Kenanga Research - 4 Oct 2018