We keep our NEUTRAL call on the sector, premised on gradual earnings recovery from ports players starting from 2H 2021 on the back of Covid-19 vaccinations rollouts, normalization of domestic and global economic activities, as well as pent-up demand effect in general. On the other hand, POSM is expected to take a longer route to profitability in a challenging environment capping its postal services segment’s profitability. It continues to operate in a competitive environment pressured by price and cost challenges, further hampered by loss of revenue from ground handling and in-flight catering with international borders still closed but reprieved by the domestic high parcel volume from stronger ecommerce and online markets and warehousing income.

WPRTS – recovery in throughput volumes starting 2HCY21. The majority of ships that call at Westports facilities are from the intra-Asia routes which recently saw easing in lockdowns and recovery in trade activities. We are cautiously optimistic that starting 2HCY21, recovery will likely be spurred by Covid-19 vaccinations, normalization of domestic and global economic activities, and pent-up demand effect in general. 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 only by 2040. The approved new container terminal expansion project is currently pending UKAS, MOT and concession agreement negotiation with the Government of Malaysia. With total capex for Westports 2 (CT10-17) amounting to ~RM10b, the new CTs are expected to nearly double capacity to 27m TEUs from 14m TEUs spread over 20 years. With anticipated full completion only by 2040, we view this investment as a very long-term play for the group, thus ruling out any earnings accretive development over the next few years. The global supply chain is adjusting to a combination of factors, such as higher consumer demand for containerised goods in Western economies, easing in lockdowns and a global supply chain adjustment adhering to COVID-19 measures. All in, we keep our MP call for WPRTS with a TP of RM4.20.

POSM taking a longer route to profitability in a challenging environment. POS’ inability to close down post offices, coupled with its unionised workforce could well mean profitability at its postal services segment is capped. The courier business will continue to operate in a competitive environment pressured by price and cost challenges. The group is continuing with its efforts to manage cost with forecasted yearly RM24m costs saving. For the rest of the year, parcel volume will continue to be elevated under the “new normal environment” especially with the introduction of PAKEJ program that is expected to drive more courier volume, and further driven by online campaigns, offsetting the reduction in footfall into post offices. However, its aviation division is expected to continue incurring losses due to loss of revenue from ground handling and in-flight catering pursuant, as international borders remained mostly closed. Maintain MP with a lower TP of RM0.720 (from RM0.800) based on unchanged 10x FY22E EPS as we cut FY22E net profit by 9% to further discount the transaction volume (mail & courier) as the recovery most likely spurred by the domestic demand with still cautious re-opening of international border. A saving grace is a 6% dividend yield.

Maintain NEUTRAL on the sector given the lack of near-term catalysts. For WPRTS, we expect it to recover gradually starting from 2H21 on the back of Covid-19 vaccinations, normalization of domestic and global economic activities, and pentup demand effect. On the other hand, POSM’s losses have expanded as reported in its recent quarterly results following the decrease in mail (-20%) and parcel volumes handled especially from contract customers affected by another lockdown (that started in June 2021) which has since gradually re-open starting 13th August 2021. On the bright side, the above was cushioned by: (i) stronger revenue in Logistics segment which returned to profit from freight management business (especially from freight forwarding) and automotive business (largely from the local automotive production volume and commencement of a new warehouse), as well as (ii) recovery in aviation division’s with increased contribution from ecommerce warehousing and cargo and ground handling businesses with better cost management.

Source: Kenanga Research - 5 Oct 2021