We keep our NEUTRAL call on the sector, premised on gradual earnings recovery from ports players starting 2022 on the back of Covid-19 booster vaccinations rollouts, normalization of domestic and global economic activities, as well as pent-up demand effect in general. On the other hand, POSM’s transformation strategy is expected to bear fruits latest by 2HFY22. POSM is facing capped profitability in its Postal/Courier businesses from tight prices and costs. This is offset by stringent cost-cutting measures and turnaround improvement from both of its logistics and aviation divisions capitalizing on freight management business, automotiverelated business and aviation division’s rising contribution from e-commerce warehousing, higher cargo tonnage handled (increasing number of flights), and ground handling businesses.

WPRTS – recovery in throughput volumes, enduring new variants outbreak. The majority of ships that call at Westports facilities are from the intra-Asia routes that saw easing in lockdowns, and recovery in trade activities despite having to endure another outbreak of the new OMICRON variants especially among the European countries. We are cautiously optimistic that starting 2022, recovery will likely spurred by Covid-19 booster 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 longerterm 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 c.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. Hence, we decreased FY21-22E CNP by 5.4-6.7% as we make adjustment on the container volume growth to better reflect the ongoing global supply chain issues offset by increase in other income from unconventional revenue of yard storage holding fee due to ports congestion. All in, we keep our MARKET PERFORM call for WPRTS but with a lower TP of RM3.95 (RM4.30) which is based on unchanged: (i) 6.2% discounting rate, (ii) 1.5% terminal growth, and (iii) dividend payout policy of 75%. The stock offers dividend yield of 3.8%.

POSM transformation strategy is expected to bear fruits latest by 2HFY22. 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. Nonetheless, 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. On the other hand, both its logistics segment and aviation divisions saw turnaround improvement in the latest results. Logistics segment was driven by freight management business (especially from freight forwarding) and automotive business (largely from the local automotive production volume and commencement of a new warehouse). Aviation division is starting to take off on increased contribution from e-commerce warehousing, higher cargo tonnage handled (increasing number of flights), and ground handling businesses with better cost management. The group is continuing its efforts to manage cost with targeted yearly RM24m costs saving. Going into 2022, Pos Malaysia will continue executing its turnaround initiatives, improving both its service and its efficiency to create the platform to capitalize on the ongoing e-commerce growth opportunities. The recent weakness in its share price is offering buying opportunity on expected turnaround in FY22 from the on-going transformation strategy. Hence, we upgrade POS to OUTPERFORM from MARKET PERFORM with unchanged TP of RM0.720 based on unchanged 10x FY22E EPS. The stocks offers dividend yield of 6.4%.

Source: Kenanga Research - 29 Dec 2021