We remain NEUTRAL on the sector. The recently concluded 2QCY22 results season was generally satisfactory (against expectations) and stable from the previous quarter. The sector navigated disruptions from intermittent lockdowns in China, a slowdown in global trade in the aftermath of the Russia-Ukraine war as well as soaring fuel cost. These headwinds are here to stay over the immediate term. In addition, consumer confidence and spending globally are likely to weaken going forward on sustained elevated inflation, rising interest rates and as households deplete their pandemic relief funds. We are cautious on seaport operators but the outlook for the logistics sector locally is stable given that it is primarily driven by domestic demand, coupled with increased demand for distribution hubs and warehouses on the back of booming ecommerce. Our top pick for the sector is BIPORT (OP; TP: RM5.90) given its ability to weather macro challenges.

2QCY22 results were largely inline. The recently concluded 2QCY22 results season was generally satisfactory with 0%, 75%, and 25% coming in above, within and below our forecasts, unchanged from the preceding quarter (see table on Page 2). Out of a total of four companies under our universe, none beat our forecast, three met expectations (BIPORT, POS and SWIFT) and one disappointed (WPRTS).The transhipment business of the seaport segment was hurt by disruptions from intermittent lockdowns in China due to Beijing’s zero-Covid policy and a slowdown in global trade in the aftermath of the Russia-Ukraine war. Not helping either was the soaring fuel cost which BIPORT managed to weather better than WPRTS given the improvement in its blended margins with growing volume of cargoes handled at Samalaju Industrial Port (that commands higher tariffs than Bintulu Port). Ironically, SWIFT benefited from high oil prices as the demand for transportation of petrochemical products, particularly for Petronas group of companies, apparently rose in tandem with stronger crude oil prices. POS continued to battle the systemic decline in its conventional mail volume with none other than its unrelenting cost cutting initiatives. Not helping either was the cut-throat competition in the parcel/express delivery segment.

Challenging outlook for global trade. We remain cautious on seaport operators in general given that the global trade outlook is more likely to soften further over the near term. A recession in Europe is almost a foregone conclusion given the protracted Russia-Ukraine war and a deepening energy crisis. Meanwhile, there is no sign of China coming out of the pandemic anytime soon given Beijing’s ineffective zero-Covid policy which is only prolonging global supply chain disruptions. Globally, consumer confidence and spending are likely to weaken going forward on sustained elevated inflation, rising interest rates and as households deplete their pandemic relief funds. However, we believe BIPORT will be able to weather these macro challenges better thanks to its stable operation in the handling of LNG cargoes, a potential hike in tariffs of Bintulu Port as well as the long-term growth potential of Samalaju Industrial Port’s hinterland in Samalaju driven by the growing investment in heavy industries.

Logistics to ride on e-commerce boom. We believe the outlook for the logistics sector locally is stable given that it is primarily driven by domestic demand. There is also increased demand for distribution hubs and warehouses on the back of the booming e-commerce. Industry experts project online gross merchandise volume (GMV) to grow at a compounded annual growth rate (CAGR) of 11% from 2022 to 2027. More local warehouses are needed to effect the followings: (i) just-in-time (JIT) delivery, (ii) reshoring/nearshoring to bring manufacturers closer to endcustomers, (iii) efficient automation system including interconnectivity with the customer system, and (iv) warehouse decentralisation to reduce transportation costs and de-risk the supply chain. There is also strong demand for cold-storage warehouses on the back of the proliferation of online grocery start-ups.

Our sector top pick is BIPORT. We like BIPORT for: (i) its steady income stream from handling LNG cargoes for Malaysia LNG Sdn Bhd (that typically makes up close to 50% of its total profits), (ii) a potential step-up in earnings if Bintulu Port is granted a significant hike in its port tariffs, and (iii) the tremendous growth potential of Samalaju Industrial Port backed by rising investment in heavy industries in Samalaju Industrial Park.

Source: Kenanga Research - 9 Sept 2022