We maintain our NEUTRAL call on the sector. The World Trade Organisation(WTO) in Oct 2022 cut its 2023 global trade growth projection to a meagre 1% (vs. 3.4% projected six months ago) on sky-rocketed energy price, protracted Russia-Ukraine war and prolonged global supply-chain disruptions. This does not augur well for seaport operators like WPRTS (MP; TP: RM3.40). However, we see a bright spot in the logistics sector locally given that: (i) it is primarily driven by domestic demand, and (ii) it is also backed by a mega trend of growth in domestic ecommerce. Our sector top picks are BIPORT (OP; TP: RM6.00) and SWIFT (OP; TP: RM1.01).

Challenging outlook for global trade. The WTO in Oct 2022 cut its 2023 global trade growth projection to a meagre 1% (vs. 3.4% projected six months ago). This is against a backdrop of a recession in Europe that is almost a foregone conclusion given the protracted Russia-Ukraine war, leading to an energy crisis. Meanwhile, China’s reopening is likely to be gradual which means there will not be an immediate end to global supply-chain disruptions. Globally, consumer confidence and spending are likely to take a beating on sustained elevated inflation, rising interest rates and a slowing global economy. These do not augur well for seaport operators like WPRTS. However, we believe BIPORT will be able to weather these macro challenges better thanks to: (i) its stable operation in the handling of LNG cargoes, (ii) a potential tariff hike at Bintulu Port as well as (iii) the longterm growth potential of Samalaju Industrial Port’s hinterland in Samalaju, Sarawak driven by the growing investment in heavy industries.

Logistics to ride on e-commerce boom. However, we see a bright spot in the logistics sector locally given that: (i) it is primarily driven by domestic demand, and (ii) it is also backed by a mega trend of growth in domestic ecommerce. Industry experts project local e-commerce gross merchandise volume to grow at a CAGR of 11% from 2022 to 2027, while its size could reach RM1.65t by 2025 from RM1t currently.

The booming e-commerce will spur demand for distribution hubs and warehouses to enable: (i) just-in-time (JIT) delivery,(ii) reshoring/nearshoring to bring manufacturers closer to end-customers, (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 a strong demand for cold-storage warehouses on the back of the proliferation of online grocery start-ups.

Our sector top picks are BIPORT and SWIFT.

We like BIPORT for: (i) the 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 a 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.

We like SWIFT for: (i) its leading position in the Malaysian haulage business commanding close to 10% market share, (ii) its value-adding integrated offerings resulting in a superb pre-tax profit margin of 10% compared to industry average of 4%, and (iii) the tremendous growth potential of its warehousing business, riding on the booming domestic e-commerce market.

Source: Kenanga Research - 30 Dec 2022