We keep our NEUTRAL call on the sector, premised on gradual earnings recovery from ports players entering 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 2HCY22. POSM is facing capped profitability in its postal/courier businesses from tight prices amid high operational 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, automotive-related business and aviation division’s rising contribution from e-commerce warehousing, higher cargo tonnage handled (increasing number of flights), and ground handling businesses.

WPRTS – posted recovery in throughput volumes while enduring new variants outbreak. The majority of ships that call at Westports facilities are from the intra-Asia routes that saw easing lockdowns and recovery in trade activities despite having to endure another outbreak of the new OMICRON variants especially among the European countries. On the other hand, the Russia-Ukraine war has somewhat delayed the supply chain recovery, albeit some of the supply was re-routed to safer intra-Asia routes. We are cautiously optimistic that entering 2022, recovery will likely be 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 its 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 c.RM10b, the new CTs are expected to nearly double its capacity to 27m TEUs from 14m TEUs spread over 20 years. With anticipate full completion only by 2040, as such 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. Renewal in investment tax allowance (ITA) is progressing gradually given the slow approval of Westports 2. Westports is also expected to take the full brunt of one-off prosperity tax (Cukai Makmur) at effective tax rate of 33% in FY22. Maintain MARKET PERFORM with unchanged DDM-derived Target Price of RM4.00 based on: (i) 6.2% discounting rate, (ii) 1.5% terminal growth, and (iii) dividend payout policy of 75%. The stock offers dividend yield of 3.9%. Risks to our call include: (i) significant deterioration/improvement in container through-put, and (ii) changes in dividend policy.

POSM’s transformation strategy is expected to bear fruits latest by 2HFY22. POSM’s 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” driven by online commerce, offsetting the reduction in footfall into post offices. On the other hand, both its logistics and aviation divisions saw turn-around improvement in their 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. Effective April 1, 2022, Pos Malaysia increased its fuel surcharge by 5% for shipments that move from Peninsular Malaysia to Sabah/Sarawak (Zone 4) and Sabah/Sarawak to Peninsular Malaysia (Zone 5) due to ongoing tension and very unfortunate events taking place in Ukraine, jet fuel price has surged sharply recently. 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 a platform to capitalize on the ongoing e-commerce growth opportunities. Maintain OUTPERFORM with a Target Price of RM0.720 based on 10x FY22E EPS. A saving grace is the 6% dividend yield. Risks to our call include: (i) slower-thanexpected profitability turnaround for its postal services and (ii) lower-than-expected margins in its courier segment.

Source: Kenanga Research - 6 Apr 2022