We keep our NEUTRAL call on the sector, premised on: (i) muted earnings from the last-mile delivery players with little signs of recovery in sight as competition remains heightened within the space, coupled with (ii) outperforming share prices from our ports player, which we believe have priced in most positives currently. Meanwhile, we note that the commendable improvement in Port Klang’s container throughput volume (+16% YoY, in 9M19) is likely to persist on the back of: (i) increase in Ocean Alliance calls, (ii) U.S.-China trade diversions to spur the gateway segment, and (iii) rapidly growing Southeast Asia economies which may expedite greater trade activities in the Intra-Asia trade lines.

Another dull quarter in 3QCY19 but was generally satisfactory for the ports players with both MMCCORP and WPRTS coming in broadly within expectations. WPRTS’ earnings came within expectations, underpinned by higher throughput (+16%) led by transhipment (+20%) and gateway (+8%) which more than offset lower conventional (-9%), with flattish opex. MMCORP’s earnings were anchored by stable ports operation and the construction and tunnelling works for MRT Line 2. However, POS Malaysia continued to remain in the red. POS missed expectations again as losses widened due to the drag from its postal service.

Signs of pick-up in port throughput volumes. After bottoming out from the tail-end residual effects of the reshuffling of shipping alliances, Port Klang’s container throughput has been recovering since FY18. Notably, WPRTS (MP; TP: RM4.15)

posted a commendable throughput growth of 16% YoY for 9MCY19 which was largely driven by the continued growth at the intra-Asia segment coupled with an increase in Ocean Alliance’s calls in its Asia-Europe segment. The trade diversions caused by the on-going U.S-China trade war also helped to spur the group’s higher margin gateway segment (+10%). Separately, WPRTS is expanding Westports 2, anticipated to commence land reclamation works from FY20 onwards. While we believe that WPRTS is well on-track with its expansion plans to cater for future trade volume growth, we reiterate our view that the expansion project is a longer-term prospect with full completion by 2040.

Persistent losses from logistics players. In the near to medium term, we believe that the crowded parcel delivery space is likely to remain saturated until intensifying competition eventually squeezes out the smaller players, leading to an industry consolidation in the longer-term. POS reported yet another quarter of losses of RM29m, weighed down by persistent double digit contraction in mail volumes. While the group continues to hope for a tariff hike, we believe that losses are likely to balloon moving forward, premised on its inability to close down post offices, unionised workforce and underperforming segments. Moving forward, their courier business is expected to continue to dampen earnings; until an eventual breakeven can be expected, likely in FY21. All-in, we opt to stay sidelined 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.

Maintain NEUTRAL, given the lack of near-term re-rating catalysts. Within our coverage, we reiterate our MARKET PERFORM call for MMCCORP and WPRTS as we believe they are already fairly valued currently. POS, on the other hand, is given an UNDERPERFORM rating given its bleak outlook, likely to be dragged further by its widening costs due to its responsibility to provide postal coverage to the entire country.

Source: Kenanga Research - 6 Jan 2020