We keep our NEUTRAL call on the sector, premised on muted earnings from ports players, which we believe growth could be at risk amid the Covid-19 pandemic. Since a majority of the ships that call at Westports are from the Intra-Asia routes, the impact from the shutdowns and quarantines will likely hit throughput, though the extent is uncertain depending on the duration of the pandemic. Separately, for POSM, the postal tariff hike on postage rates for registered and commercial mails could see potential average RM12m incremental monthly revenue flow straight to bottom-line. We expect a turnaround to profitability for POSM in subsequent quarters. Overall, we are downgrading our TP for the stocks under our coverage to reflect the de-rating of the market on the back of a much bleaker economic outlook, both globally and for Malaysia. Following our downgrade, these are our new TPs; WPRTS (MP; TP: RM3.65), MMCORP (MP; TP: RM0.620) and POSM (OP; TP: RM1.07)

WPRTS - weakened throughput volumes expected. Since the majority of the ships that call at Westports are from the intra-Asia routes, the impact from the shutdowns and quarantines will likely hit throughput, though the extent is uncertain depending on the pandemic duration. Going forward, we are cautious on the 2020 business outlook due to the coronavirus outbreak that has resulted in disruption on China logistic, regional shipping and port industries and further exacerbated by weakened regional consumption, thereby lowering container volume. In view of these uncertainties, we tweak our throughput assumption downwards to 2% growth from 8% for FY20 translating into 7% reduction in our FY20E earnings forecast. 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. All-in, we keep our MP call with a lower TP of RM3.65 from RM4.05. Reiterate MP.

MMCORP - Ports and MRT 2 are the main earnings contributors. Going forward, MMCCORP’s earnings are expected to be anchored by its ports operation and the construction and tunnelling works for MRT Line 2. However, we remain cautious of a potentially weaker 1H 2020 for the group’s ports segment, against the backdrop of the current global uncertainties. Currently, its ports portfolio consists of Port of Tanjung Pelepas (PTP), Johor Port, Northport, Penang Port and Tanjung Bruas Port. Meanwhile, the construction progress for MRT Line 2 is at 67% for the elevated portion, and 71% for tunnelling portion as at Dec 2019. We gathered that while its construction order-book is currently at c.RM6.6b (87% from MRT Line 2), management is currently actively bidding for new projects in order to meet its targeted order-book replenishment of c.RM500m p.a. However, we downgrade our TP for MMCORP from RM0.970 to RM0.62 based on 0.2x FY20E book value (-2.0SD below 5-year historical forward average) to reflect the de-rating of the market on the back of a bleaker economic outlook, both globally and for Malaysia. Reiterate MP.

POSM expects turnaround to profitability in subsequent quarters. The upward revision in postal rates is a positive to Pos Malaysia Berhad (POSM), raising postage rates for registered mails, commercial mails and small parcels following Government’s approval, effective 1 February 2020. We expect potential average RM12m incremental monthly revenue which is expected to flow straight to bottom-line. The key risk of this one-time adjustment includes the inability of POSM to accommodate its social and commercial responsibilities, especially if the hike in commercial postal rates potentially causes mail volumes to deteriorate even further from current levels. Meanwhile, given POS’ inability to close down post offices, coupled with its unionised workforce and losses in its postal services segment, turning the postal division around will remain challenging. The courier business continues to operate in a competitive environment pressured by price and cost challenges. The group is continuing with its efforts to manage cost whilst increasing operating efficiency. The Integrated Parcel Centres (IPC) in Shah Alam and newly completed facility in KLIA has increased the processing capacity by 77% from 300,000 to 530,000 parcels per day. However, we cut our TP from RM1.95 to RM1.07 based on 10x FY20 EPS of 10.7 sen (previously 18x) to reflect the de rating of the market on the back of a bleaker economic outlook, both globally and for Malaysia. Maintain OP.

Maintain NEUTRAL, on the sector given the lack of re-rating catalyst in the near-term. MMCCORP’s earnings are expected to be mainly driven by its ports operations coupled with construction works for MRT 2 which could come under pressure due to Covid-19. Meanwhile, we expect WPRTS’ earnings to be under pressure due to the virus outbreak since intra-Asia trades account for an estimated 60% of throughput of which the route is negatively impacted. We view WPRTS as a longer-term prospect with land reclamation of Westport 2 likely to commence from 3QCY20, anticipating full completion only by 2040. That said, we rule out any earnings accretive development over the next two years. On the other hand, we expect POS Malaysia to turn around in FY20 due to upward rates revisions for registered mails, commercial mails and small parcels following Government’s approval, effective 1 February 2020.

Source: Kenanga Research - 3 Apr 2020