The sector has continued to underperform the broader market. None of the counters in our coverage registered any share price appreciation in 2018, but collectively posted an average decline of 44.8%. For courier services players, earnings delivery is still the key as they continue to operate in a margin oppressive environment amidst intensifying pricing competition. Meanwhile, we believe container throughput growth in Port Klang has already bottomed out, after recording a 9M18 decline of 0.4% YoY due to tail-end residual effects of M&A and alliances reshuffling activities among global shipping lines. Moreover, global port activities are still healthy and we believe the US-China trade war will have a minimal impact, at least in the immediate-term. All-in, we maintain our container throughput growth forecasts for 2019 at 5%. We also take this opportunity to lower our TP and call for MMCCORP (MP; TP: RM0.950), downgrade POS’s TP (UP; TP: RM1.50) and CJCEN’s TP (MP; TP: RM0.490) on earnings volatility. Maintain NEUTRAL on the sector, given the lack of re-rating catalyst.

Continued underperformance sector-wide. Investment returns for the sector continued to under perform the broader market. In 2018, our sector coverage posted an average loss of 44.8%, versus FBMKLCI and FBMSC losses of 7.5% and 32.2%, respectively. For the 4QCY18 quarter, our sector coverage averaged losses of 30.0% vs. average gains of 0.9% in 3QCY18, likely due to disappointing results, particularly for POS. POS declined 52.2% during the quarter, following its disappointing 1H19 results, which saw it raking in losses due to wider-thanexpected losses from its postal services and international segments.

Earnings growth risk to persist among logistic players. Going forward, the last-mile delivery space is expected to remain saturated due to intensifying competition, particularly within the e-commerce space. As logistics players compete for market share, increasingly competitive pricing is a key factor causing margin compression that further dulls earnings recovery for these counters. In its latest 2Q19,

POS’s earnings deterioration persisted with 1H19 plunging into losses of RM11.6m from net profit of RM54.7m in 1H18, mainly dragged by lower contribution from both its postal services and international segments. Losses is expected to continue to widen going forward due to elevated opex, increased competition coupled with sustained expansion efforts. Similarly, CJCEN saw its 9M18 earnings declining 22% YoY owing to start-up costs and lower warehouse utilisation, which are expected to persist alongside flattish earnings outlook in the near to medium-term. All-in, we reiterate our stance to stay sidelined from this subsector as we await meaningful earnings recovery, most likely from companies maturing out of gestation phases from their current expansion plans.

Trade war’s effect on global ports. We believe the near-term impact from the trade war between China and US towards the ports industry is the reduction of container volume for trans-pacific network, i.e. between China and US due to the tariffs. However, based on statistics for now, we note that global ports activities is still healthy as we do not see major decline from the global container port throughput indices YoY (refer to chart in Appendix). More importantly, Asia’s throughput index (excluding China) continued to show growth of 6.3%. Thus, we believe that there is a minimal impact to global ports in the near term, while the long-term impact remains uncertain.

Positive throughput growth for Port Klang moving forward. For 9M18, Port Klang saw its container throughput dropping 0.4% YoY to 9.1m TEUs due to tail-end residual effects from M&A activities and alliances reshuffling among global shipping liners that took place in 2017. We believe container throughput has now bottomed out and expect moderate growth moving forward from low-base effect and driven by organic economic growth. Moreover, as stated above, we see minimal near-term impact from US-China trade war as it should mostly only affect trans-pacific shipment routes. All-in, we are maintaining our view of around 5% container throughput growth for FY19.

Maintain NEUTRAL, given the lack of any major re-rating catalysts within the sector. Meanwhile, we are downgrading our call and TP for MMCCORP to MP and RM0.950 (from OP, TP: RM1.30), respectively, as we are concerned of the earnings volatility from cost overruns (administrative and operating expenses) and a lack of conviction on the stability for the ports segment, prompting us to relook our valuations. As such, we have increased our discount rate to 30% (from 25%) on a lower growth rate of 0.5% (from 1%), implying a PBV of 0.3x (from 0.4x previously). For POS, we downgrade its TP to RM1.50 (from RM2.95) based on 0.6x FY19E BVPS in line with its trough valuation but maintain our UP call. We changed our valuation methodology from Sum-of-Parts to Book Value due to the volatile and uncertain quarterly earnings ahead. We believe POS will suffer from an environment of sustained high opex coupled with intensifying competition while its continued expansion efforts have led to stagnating margins, thus causing profit deterioration despite volume and revenue growth. Given POS’s inability to close down post offices, coupled with its unionised workforce, losses in its postal services are expected to continue widening moving forward. We also reduced our TP for CJCEN to RM0.490 (from RM0.520) as we readjust the discounting rate to 6.8% (from 6.5%) to account for the rising uncertainties with the increasingly competitive logistics industry.

Source: Kenanga Research - 4 Jan 2019