Kenanga Research & Investment

Seaport& Logistics - Out of Rough Seas

Publish date: Wed, 20 Dec 2023, 09:18 AM

We upgrade our call to OVERWEIGHT from NEUTRAL. The World Trade Organisation (WTO) projects global merchandise trade volume to grow by 3.3% in CY24, more than quadrupling a 0.8% growth estimated for CY23. Already, there have been green shoots of recovery in the intraAsia trade, and a more synchronised recovery in the global economy could happen in 2HCY24 on policy easing by central banks in advanced economies. We acknowledge that global trade will have to navigate stricter regulations on carbon emissions. We continue to see a bright spot in the domestic logistics sector as it is: (i) driven internally and less directly exposed to external headwinds, and (ii) a beneficiary of the booming e-commerce. Our sector top picks are WPRTS (OP; TP: RM3.80) and SWIFT (OP; TP: RM0.63).

Modest growth for global trade amid stricter regulations. The WTO projects global merchandise trade volume to grow by 3.3% in CY24, more than quadrupling a 0.8% growth estimated for CY23. We believe that there is a good chance for a more synchronised recovery in the global economy towards 2HCY24 underpinned by policy easing by central banks in advanced economies. This augurs well for port operators.

Already, there have been green shoots of recovery in the intra-Asia trade (which mostly driven by China) as evidenced by the recent 3QCY23 results of WPRTS and BIPORT (MP; TP: RM5.55). Having beaten analysts’ forecasts, WPRTS raised its guidance for CY23F container volume growth to 5%-10% (vs. 0%-5% previously) on brisk solar panel and waste paper recycling trade. Similarly, BIPORT reported a pick-up in LNG exports to China as well as inbound and outbound cargoes from Samalaju-based smelters PMETAL (MP; TP: RM5.00) and OMH (OP; TP: RM2.07).

We acknowledge that stricter regulations on carbon emissions may pose new challenges to global trade, particularly, one from the United Nations’ International Maritime Organization (IMO) and another from the European Union (EU). While the exact implications of the regulation of IMO and EU’s Carbon Border Adjustment Mechanism (CBAM) on the seaport and logistics sectors remain unclear (especially for CBAM which is still pending finalisation), the volume of containers heading to the EU will certainly be affected (about 18% of container throughput under Asia-Europe trade), especially those originating from China, which is a major exporter of iron, steel and aluminium to the EU.

1. Under the new IMO rules, effective January 2023, all ships must report their carbon intensity and will be rated accordingly. The ships must record a 2% annual improvement in their carbon intensity from 2023 through 2030 or face being removed from service.

2. Meanwhile, the EU’s CBAM policy could disrupt the exports of certain commodities (iron and steel, cement, aluminium, fertiliser, electricity, hydrogen) to the EU. During the transition period between Oct 2023 and Dec 2025, EU importers must report embedded emissions in goods imported on a quarterly basis, as well as any carbon price paid to a third country. When the CBAM takes full effect starting 2026, importers will need to buy carbon credits reflecting the emissions generated in producing them.

Logistics to ride on e-commerce boom. Meanwhile, we see a bright spot in the domestically-driven third-party logistics (3PL) sector which is less vulnerable to external headwinds being buoyed by the booming e-commerce. Industry experts project the local e-commerce gross merchandise volume to grow at a CAGR of 7% from 2023 to 2027, with size reaching RM1.9t by 2027 from RM1.4t in 2023.

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 strong demand for cold-storage warehouses on the back of the proliferation of online grocery start-ups.

Our sector top picks are:-

1. WPRTS for: (i) its resilient earnings underpinned by long-term contracts with key clients such as Ocean Alliance, (ii) its long-term growth prospect driven by the Westports 2 expansion project, and (iii) its price competitiveness, i.e. lower transhipment tariffs vs. peers such as Port of Tanjung Pelepas and Port of Singapore.

2. SWIFT for: (i) its leading position in the Malaysian haulage business commanding close to 10% market share, (ii) its value-added 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.

Source: Kenanga Research - 20 Dec 2023

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