We keep our NEUTRAL call on the sector, premised on muted earnings from ports players, due to risks emanating from the persistent Covid-19 pandemic. Since a majority of the ships that call at Westports are from the Intra-Asia routes, the impact from the possible future shutdowns and quarantines will likely hit throughput, though the extent is uncertain depending on the dynamics of the on-going pandemic. Separately, for POSM, the postal tariff hike on postage rates for registered and commercial mails had failed to turn its earnings around to profitability in 2QFY20. Overall, sector earnings could be further dragged down amid the pandemic. With muted catalyst going forward, there could be potential de-rating on the back of a bleaker economic outlook, both globally and for Malaysia.

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 possible future shutdowns and quarantines will likely hit throughput, though the extent is uncertain depending on the pandemic duration. Going forward, we are cautious on 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. 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. In terms of dividends, the payout ratio guidance is lowered from 75% to 60% in FY20 to conserve cash for 2021 when the new container terminal expansion project is expected to commence with the purchase of Marina Land and land reclamation. All-in, we keep our MP call with a TP of RM3.65. Reiterate MP.

MMCCORP - Ports and MRT 2 are the main earnings contributors. Looking ahead, we expect a slower 2HFY20 as we anticipate a slowdown in ports due to the pandemic and no new key projects in engineering. Going forward, MMCCORP’s earnings are anticipated to be largely buoyed by its ports operation and utilities, namely Malakoff. However, we remain cautious of a market de-rating on the back of a bleaker economic outlook, both globally and for Malaysia. Currently, its ports portfolio consists of PTP, Johor Port, Northport, Penang Port and Tanjung Bruas Port. That said, we do not discount management continuing their pursuit to acquire additional ports to boost their profile as the largest port operator in the country. We gathered that while its construction order-book is currently at c.RM4.9b (90% from MRT Line 2), management is actively bidding for new projects in order to meet its targeted order-book replenishment of c.RM500m p.a.

Outlook challenging despite POSM looking to turn around to profitability in subsequent quarters. 2QFY20 net losses narrowed to RM19m compared to RM49m in 1QFY20 due to postal services returning to the black but was offset by higher losses at aviation segment (mainly due to loss of revenue from ground handling and in-flight catering pursuant to flight cancellations in the wake of Covid-19 pandemic where international borders were mostly closed) and logistics segment. 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 highly 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. As such we downgrade our TP from RM0.90 to RM0.81 based on 9x FY21 EPS. Reiterate Market Perform.

Maintain NEUTRAL on the sector given the lack of catalysts 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 also under pressure due to the virus outbreak since intra-Asia trade accounts 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 FY21, 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 continue facing tough operating environment due to the pandemic, intense competition in the courier segment and continuing losses at postal division.

Source: Kenanga Research - 7 Oct 2020