Kenanga Research & Investment

Seaports & Logistics - 1QCY23 Results Review: Uneven Recovery

Publish date: Mon, 12 Jun 2023, 09:44 AM

The sector’s 1QCY23 results saw weakened earnings delivery vs. three months ago. The topline picture was mixed. The export of containerised and LNG cargoes was strong but China’s reopening failed to lift inbound and outbound cargoes from heavy industries. Not helping either was the rising operating cost. Meanwhile, the courier segment saw intensified competition. Amidst the global economic uncertainty, the World Trade Organisation (WTO) projects the global merchandise trade volume to only inch up by 1.7% in CY23, down from a 2.7% expansion in CY22. Additionally, stricter regulations on carbon emissions may pose new challenges to global trade. This does not augur well for seaport operators like WPRTS (MP; TP: RM3.65). However, we see a bright spot in the domestic logistics sector as: (i) it is driven internally and less directly exposed to external headwinds, and (ii) it is a beneficiary of the booming ecommerce. Our sector top picks are BIPORT (OP; TP: RM5.55) and SWIFT (OP; TP: RM0.97). We maintain our NEUTRAL call on the sector.

The sector’s 1QCY23 results saw weakened earnings delivery vs. three months ago with only WPRTS meeting our expectation, while BIPORT, POS and SWIFT missed our forecasts. WPRTS scraped past thanks to lower fuel costs that cushioned a slight easing in its topline as stronger container volume was offset by lower average revenue per TEU (on lower storage income as port congestion came to an end).

Players benefited from strong gateway volume on the back of an export boom. BIPORT’s LNG cargo volume grew 7% YoY on stronger demand from Japan and South Korea. POS’s logistics sales recovered strongly with the upliftment of the coal export ban imposed by Indonesian government. WPRTS’s gateway container volume (+6%) remained strong on the back of brisk exports by local manufacturers (partly fuelled by the weak ringgit), while SWIFT rode on the increased in ports’ activities.

However, BIPORT disappointed mainly on a slowdown in cargo volume at Samalaju Industrial Port as China’s reopening failed to significantly lift the demand for aluminium and manganese, while SWIFT was hit by higher operating cost to support its expansion. On the other hand, POS registered wider quarterly loss as its cost-cutting measures could not counter further deterioration at its postal segment due to: (i) decline in its courier volume as competitors cut prices, and (ii) accelerated insourcing of delivery function by e-commerce players.

Slowing global trade. The WTO projects global merchandise trade volumes to only inch up by 1.7% in CY23 (minor revision from previous forecast of 1% due to China re-opening), down from a 2.7% expansion in CY22, amid the global economic uncertainty. Also, consumer confidence and spending globally are likely to take a beating on sustained elevated inflation, rising interest rates and the slowing global economy.

These issues 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 long-term growth potential of Samalaju Industrial Port’s hinterland in Samalaju, Sarawak driven by the growing investment in heavy industries.

Additionally, 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 importers, on a quarterly basis as well as any carbon price paid in 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. However, we see a bright spot in the logistics sector locally as: (i) it is domestically driven and less directly exposed to external headwinds, and (ii) it rides on the booming e-commerce. Industry experts project the 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 strong demand for cold-storage warehouses on the back of the proliferation of online grocery start-ups.

Our sector top picks are:

  • 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 earnings), (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.
  • 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 - 12 Jun 2023

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