The sector entered 2019 with a slight recovery in share prices as our coverage saw an average YTD gain of 13%, in tandem with the gain made in FBMSC (YTD +13%). For logistic players, earnings growth risk continues to cast uncertainties over the subsector, as the margin-compressive environment is unlikely to recover in the nearterm. On the other hand, Port Klang saw 2018 container throughput rising 2.7% YoY. We believe container throughput has already bottomed out, recovering from the previous tail-end residual effects of M&A and alliances reshuffling activities among global shipping liners. Moving forward, we reiterate our view of c.5% container throughput growth for 2019, driven by organic economic growth and low-base effect. We also see a minimal impact from the current U.S.-China trade war as it will likely only affect trans-pacific shipment routes. Maintain NEUTRAL on the sector, given the lack of re-rating catalyst.

Slight recovery in share prices. In 2018, our sector coverage posted an average loss of 44.8%, dwarfing FBMKLCI and FBMSC losses of 7.5% and 32.2%, respectively. However, moving into 2019, the share had since recovered as our coverage saw an average YTD gain of 13%, in tandem with the gains made in FBMSC (YTD +13%). Notable names to mention for the quarter include MMCCORP and CJCEN. While MMCCORP (MP; TP:RM1.10) made huge share price gain of 24% YTD, we believe this is driven mainly by the positive market sentiment towards its construction segment, also shown by the recovery in KLCON index (+22% YTD). As for CJCEN, it managed to register 15% share price gain despite its FY18 earnings missing expectation.

Margin compression continues to hurt logistic players. The crowded last-mile delivery space is anticipated to remain saturated before heightened competition squeezes out the smaller companies, eventually leading to an industry consolidation in the longer-term, in our view. In the meantime, stagnating earnings growth continues to be a key concern among the logistics players as the intensifying pricing competition persists to compress margins. In its recent 3Q19 quarterly results, POS’ (UP; TP: RM1.50) results continued to disappoint with 9M19 plunging into losses, greatly burdened by weaker performances from its postal services, courier services and international segments. Losses are expected to continue widening moving forward, owing to the margin compressive environment, which is unlikely to recover in the near-term. Coming in below expectations, CJCEN (UP; TP:RM0.400) also saw its FY18 earnings sliding 42% YoY as its 4Q18 turned red, mainly dragged by start-up costs from its new courier business and continued margin compression that is expected to persist alongside flattish earnings outlook for its conventional logistics business. All things considered: we opt to stay side-lined from this sub-sector as we await meaningful earnings recovery, most likely from: (i) companies maturing out of their expansion gestation phases, and (ii) an eventual consolidation of the industry.

Moderate throughput growth for Port Klang. For 2018, Port Klang saw its container throughput increasing 2.7% YoY to 12.3m TEUs. We believe container throughput has already bottomed out from the tail-end residual effects of M&A activities and alliances reshuffling among global shipping liners that took place in 2017. Moving forward, we expect moderate growth from lowbase effect and further driven by organic economic growth. Moreover, we see a minimal near-term impact to Port Klang 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 2019. In terms of capacity expansion for Port Klang, WPRTS (MP; TP: RM3.75) has completed the design phase of CT10 to CT19 and is seeking approvals from relevant authorities. No specific timeline has been revealed yet, but we do not expect CT10 to come on stream over the next 2 years.

Maintain NEUTRAL, given the lack of any re-rating catalysts within the sector. Within our coverage, most of the calls are MARKET PERFORM as we do not see any positive catalyst while we have already priced in most of the downside risk. POS, on the other hand, is given an UNDERPERFORM rating as its outlook appears bleak with POS suffering from 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. We also take this opportunity to cut our DCF-driven Target Price for CJCEN, another UNDERPERFORM call, from RM0.490 to RM0.400, implying 19x PER which is in-line with -1S.D. from its mean PER of 30x based on: (i) 6.8% discount rate, and (ii) 1% terminal growth. Its earnings volatility from a lack of stability for its procurement logistics segment that showed short-lived improvement in FY18 prompted us to relook our valuations. As such, we have revised FY19/20E earnings downwards by c.6% each to RM8.9m/RM9.5m respectively to account for lower contribution from this segment.

Source: Kenanga Research - 4 Apr 2019