shipping, ports & logistics neutral...2017/07/07 · shipping, ports & logistics sector...

Sector Update

07 July 2017

PP7004/02/2013(031762) of 7

Shipping, Ports & Logistics NEUTRAL Strong Winds but Weak Currents ↔ By Steven Chan / [email protected]

We observed that the positive trading sentiments am ong logistics counters have begun to slow down in the last quarter, with momentum switching to be more stock-specific plays rather than a sector-wide theme. Leveraging on the impending growth of e -commerce appears to remain as the key theme, with integrated logistics players mostly venturing to expand related delivery services to increase the ir exposures in e-commerce. Likewise, parcel delivery players POS and GDEX are still favoured as the main earnings beneficiary of the growing e-commerce trend. However, we opted to stay side-lined given their lofty valuations. As for ports, we are expecting the post-alliance reshuffling environmen t to adversely impact WPRTS while the impact should b e neutral on PTP. Meanwhile, we also see limited catalyst for MISC, with charter rates yet t o show any signs of recovery. MMCCORP emerged as our preferred pick within the sector, with a potent ial listing of its port operations to act as a re-r ating factor. Since our initiation on GDEX with an OUTPER FORM call, its share price had rallied by a whopping 51%. We believe that foreseeable positives are already more than priced in, and would urge investors to take profit at current levels. Overall , we maintain our NEUTRAL stance on the sector.

Momentum slowing down. Earlier in the year, logistics counters were under the spotlight following positive trading sentiments from the launching of the Malaysian Digital Free Trade Zone (DFTZ), with an average YTD gain of +35%. However, 2Q17 saw a slight slowdown in momentum, recording an average price gain of +10% during the quarter, as compared to an average of +23% in 1Q17. We noticed that gains in 2Q17 were more stock-specific as opposed to a sector-wide rise. CENTURY and GDEX displayed continued uptrends, and were by far the best-performing stocks during the quarter at +36% and +25%, respectively. Meanwhile, for the rest which includes POS (+13%), TASCO (+11%), XINHWA (+5%), TNLOGIS (+4%), FREIGHT (-1%), and NATWIDE (-13%) all posted slower share price performances during 2Q17 as compared to 1Q17. (Please note our report cut-off date is set at 23 June 2017).

E-commerce play within logistics space. Leveraging on the growth of e-commerce continues to be the story among logistics players. Within our coverage universe, integrated logistics player TNLOGIS (MP, TP: RM1.71) recently ventured into cross-border trucking to take advantage of e-commerce goods movements to-and-from Shenzhen, China. Cross-border trucking is seen to be a cheaper and faster alternative as compared to sea freight. The company had also recently ventured into the last-mile delivery space under the brand name “instant”. We believe that as a full-fledged logistics player, TNLOGIS has an added advantage of being able to integrate its multiple operations to provide clients with seamless logistics solutions. Coupled with its warehousing capacity expansion plans, we do not discount TNLOGIS securing additional contracts in the upcoming future. However, we also do expect initial earnings impact from these new ventures to be minimal due to gestation, but potentially playing out as a longer-term positive. Outside our coverage, CENTURY (Not Rated) had also recently announced securing a non-universal service licence to operate its courier services – marking another step closer towards kick-starting its last-mile business. Trucking and warehousing player XINHWA (Not Rated) had also recently launched its own e-commerce platform “e5buy”, targeting the domestic online wholesale market. Parcel volume to continue robust growth. In the last quarter, both parcel delivery players - POS (UP, TP: RM4.00) and GDEX (UP, TP: RM0.48), recorded healthy growth of 15-17% YoY in parcel delivery revenue. We expect the positive trends to continue, underpinned by growing popularity of e-commerce. From our understanding, POS and GDEX continued to sustain market dominance, positioned at number one and two, respectively, in terms of market share. As such, we opine that these two players will remain as direct earnings-beneficiaries of the growing e-commerce scene. Of the two, we believe GDEX is the better earnings proxy, given its pure-play parcel delivery business model, while POS’s earnings continue to be dragged by its declining postal mail and retail businesses. The upcoming secondary hub should help GDEX in easing capacity constrains faced in its main sorting hub, which is believed to be the key limiting factor for GDEX to experience exponential volume growth. Furthermore, we also do not discount GDEX to continue its pursuit of inorganic growth given that most of the funds raised from the YAMATO private placement is still intact. Meanwhile, POS is expected to allocate 80% of its redeveloped LCCT terminal to Lazada as an e-fulfilment centre, with POS playing the role as a logistics provider. POS is also expected to benefit from an additional stream of income after the acquisition of KLAS. Shipping alliance reshuffling starting to take effec t. With the new shipping alliances taking effect starting 1 April, the upcoming round of corporate results from the ports should reflect the first quarter of earnings impact post-reshuffling. Leading up to that, WPRTS (MP, TP: RM4.10) posted lower YTD-end May container throughput of 3.95m TEUs, representing a 3% YoY decline, mainly attributed to the effects of the alliance reshuffling. This is in line with our expectations of lower throughput post-reshuffling for WPRTS, as the previous Ocean Three alliance transitions into the Ocean Alliance. This is coupled with volume losses from CMA CGM to PSA, as well as the completed merger between UASC and Hapag-Lloyd. Overall, we expect 2017 to be a new base for WPRTS in which the port can organically grow, underpinned by expansion plans of CT8 Phase 2 and CT9 Phase 1. Meanwhile, we expect the alliance reshuffling to have a largely neutral impact for PTP, operated by MMCCORP (OP, TP: RM 2.90), as it mainly serves the 2M Alliance, which saw minimal changes during the reshuffling.

Shipping, Ports & Logistics Sector Update 07 July 2017

PP7004/02/2013(031762) of 7

No reprieve in charter rates. So far, we have yet to see the light at the end of the tunnel for tankers rates due to refinery maintenance, higher tanker fleet growth and shrinking remand as a result of OPEC production cut. VLCC average spot rates in May dropped to a low of USD15.5k/day (-38% MoM; -66% YoY), approaching new lows in the past few years. Suezmax average spot rate in May had fallen marginally by 3% MoM to USD17.4/k/day while Aframax rates have seen some improvement of 7% MoM. We do not foresee strong catalysts to drive up the charter rates in the near-term as OPEC has agreed to extend its production cut deal for another nine months up to end of March next year amidst excess tonnage in the market. On the flip side, LNG spot rates also rebounded 7% MoM backed by new gas projects in Asia Pacific. However, this might not be sustainable as vessel oversupply is likely to persist with new build LNG tankers coming online this year and next. Overall, we see limited catalyst in our sole shipping coverage, MISC (MP, TP: RM8.04) in the near term even with the recent win of 2 DP shuttle tankers contract from Statoil. Having said that, MISC’s balance sheet remains healthy with net gearing of 0.2x, allowing it to seek opportunistic brown field replacement projects and shallow-water assets requirement in the region.

Maintain NEUTRAL stance on sector. Being the only OUTPERFORM call among our coverage universe, MMCCORP stands as the preferred pick within the sector. MMCCORP's forward earnings are expected to be mainly sustained from: (i) growth from its port operations, which is the group’s main earnings contributor, (ii) KVMRT 2 underpinning construction earnings, and (iii) potential land sales from Senai Airport City. Following the completed acquisition of Penang Port, MMCCORP will further solidify its position as the largest port operator in the country, operating most of the major ports along the west coast of Peninsular Malaysia. Furthermore, we believe that a potential future listing of its port operations would warrant a re-rating. On the other hand, despite being regarded as earnings proxies for the growth of e-commerce within the country, we prefer to stay side-lined from parcel delivery players POS and GDEX given their lofty valuations, both with UNDERPERFORM calls. GDEX had already gained +51% since our OUTPERFORM call initiation last December, and thus, we would urge investors to take profit at current price levels as we believe it is trading beyond fundamentals. We are also maintaining calls for the rest of our coverage, with MARKET PERFORM calls on BIPORT, MISC, TNLOGIS, and WPRTS.

Existing S hipping Alliances New Shipping Alliances after 1 April 2017

Source: Kenanga Research, Google Image Search Notable points: � UASC completed merger with Hapag-Lloyd in May 2017 � Hanjin declared bankrupt in February 2017 � HMM joined 2M alliance in vessel sharing agreement, rather than full membership � CSCL merged with COSCO to form China COSCO Shipping in January 2016 � CMA CGM acquired APL (NOL) in June 2016


PP7004/02/2013(031762) of 7

Tanker Charter Rates Dry Bulk Vessel Charter Rates

-

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

100,000

USD/day

VLCC Suezmax Aframax LR2 (105K dwt) LR1 (80K dwt) MR (40K dwt)

-

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

180,000

200,000

USD/day

Panamax (75K dwt) Handysize (53K dwt)

Capesize (170K dwt) Capesize (180K dwt)

Source: Fearnleys, Kenanga Research

LNG Vessel Charter Rates Bunker Costs Versus Baltic Dry Index

-

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

180,000

USD/day

LNG

Suez East 155-165' cbm 1 yr TC 155-165' cbm Suez West 155-165'cbm

0

100

200

300

400

500

600

700

800

0

500

1000

1500

2000

2500

3000

3500

4000

4500

5000

Jun-09 Jun-10 Jun-11 Jun-12 Jun-13 Jun-14 Jun-15 Jun-16 Jun-17

Bu

nk

er

Co

st

US

D/M

T

Ba

ltic

Dry

In

de

x U

SD

/m

t

Baltic Dry Index (Left side) Weighted Average 380cST Bunker Fuel Price (Right side)

Source: Fearnleys, Bloomberg, Kenanga Research

BIPORT – Fwd PER Band BIPORT – Fwd PBV Band

6.00

6.20

6.40

6.60

6.80

7.00

7.20

7.40

7.60

7.80

8.00

RM PRICE (RM) PER 18.1 x PER 19.9 x PER 21.7 x PER 23.4 x PER 25.2 x

5.50

6.00

6.50

7.00

7.50

8.00

RM PRICE (RM) PBV 2.3 x PBV 2.6 x PBV 2.9 x PBV 3.1 x PBV 3.4 x

Source: Kenanga Research


PP7004/02/2013(031762) of 7

GDEX – Fwd PER Band GDEX – Fwd PBV Band

0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

0.80

Jun-12 Dec-12 Jun-13 Dec-13 Jun-14 Dec-14 Jun-15 Dec-15 Jun-16 Dec-16 Jun-17

PRICE (RM) PER 28.4 x PER 46.2 x PER 64.0 x PER 81.8 x PER 99.6 x

0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

0.80

Jun-12 Dec-12 Jun-13 Dec-13 Jun-14 Dec-14 Jun-15 Dec-15 Jun-16 Dec-16 Jun-17



MISC – Fwd PER Band MISC – Fwd PBV Band

3.50

5.50

7.50

9.50

(RM) Price (RM) PER 10.4 x PER 13.1 x PER 15.8 x PER 18.4 x PER 21.1 x

3.00

4.00

5.00

6.00

7.00

8.00

9.00

10.00

(RM) Price (RM) PBV 0.7 x PBV 0.8 x PBV 0.9 x PBV 1.0 x PBV 1.1 x


MMCCORP – Fwd PER Band MMCCORP – Fwd PBV Band

1.50

1.70

1.90

2.10

2.30

2.50

2.70

2.90

RM


1.50

1.70

1.90

2.10

2.30

2.50

2.70

2.90

RM

PRICE (RM) PBV 0.5 x PBV 0.7 x PBV 0.8 x PBV 1.0 x PBV 1.2 x



PP7004/02/2013(031762) of 7

POS – Fwd PER Band POS – Fwd PBV Band

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

8.00

Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17


0.00

2.00

4.00

6.00

8.00

10.00

12.00

Jun-14 Oct-14 Feb-15 Jun-15 Oct-15 Feb-16 Jun-16 Oct-16 Feb-17 Jun-17



TNLOGIS – Fwd PER Band TNLOGIS – Fwd PBV Band

0.80

1.00

1.20

1.40

1.60

1.80



0.80

1.00

1.20

1.40

1.60

1.80

Jun-14 Oct-14 Feb-15 Jun-15 Oct-15 Feb-16 Jun-16 Oct-16 Feb-17 Jun-17



WPRTS – Fwd PER Band WPRTS – Fwd PBV Band

2.50

3.00

3.50

4.00

4.50

5.00



2.50

3.00

3.50

4.00

4.50

5.00





PP7004/02/2013(031762) of 7

Sector Peers Comparisons

Company Price @ 23 June 2017 Mkt Cap PER (x)

Est. Div. Yld.

Hist. ROE

Hist. P/BV NP Growth (%) Target Rating

(RM) (RM'm) CY16 CY17 CY18 (x) CY17 CY18 (RM)

BIPORT 6.07 2,792.2 18.6 18.5 17.7 3.8% 13.0% 2.4 0.7% 4.8% 6.60 MARKET PERFORM

GDEX 0.64 3,568.8 106.2 94.7 75.0 1.6% 9.7% 10.3 12.2% 26.2% 0.48 UNDERPERFORM

MISC 7.40 33,032.1 16.6 17.1 16.0 2.7% 5.2% 0.9 -2.7% 6.6% 8.04 MARKET PERFORM

MMCCORP 2.40 7,308.1 14.3 14.7 13.5 1.7% 5.4% 0.8 -2.9% 9.0% 2.90 OUTPERFORM

POS 5.16 4,039.1 48.0 33.6 32.9 2.9% 7.5% 3.6 42.9% 2.2% 4.00 UNDERPERFORM

TNLOGIS 1.76 765.0 14.9 9.0 8.6 2.8% 7.4% 1.1 66.5% 4.0% 1.71 MARKET PERFORM

WPRTS 3.71 12,651.1 20.1 21.1 19.2 3.6% 30.4% 6.1 -4.9% 10.2% 4.10 MARKET PERFORM

Simple Average 34.1 29.8 26.1

Weighted Average 21.1 20.8 18.6

Source: Bloomberg, Kenanga Research

This section is intentionally left blank.


PP7004/02/2013(031762) of 7

Stock Ratings are defined as follows: Stock Recommendations OUTPERFORM : A particular stock’s Expected Total Return is MORE than 10% MARKET PERFORM : A particular stock’s Expected Total Return is WITHIN the range of -5% to 10% UNDERPERFORM : A particular stock’s Expected Total Return is LESS than -5% Sector Recommendations*** OVERWEIGHT : A particular sector’s Expected Total Return is MORE than 10% NEUTRAL : A particular sector’s Expected Total Return is WITHIN the range of -5% to 10% UNDERWEIGHT : A particular sector’s Expected Total Return is LESS than -5% ***Sector recommendations are defined based on market capitalisation weighted average expected total return for stocks under our coverage.

This document has been prepared for general circulation based on information obtained from sources believed to be reliable but we do not make any representations as to its accuracy or completeness. Any recommendation contained in this document does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may read this document. This document is for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees. Kenanga Investment Bank Berhad accepts no liability whatsoever for any direct or consequential loss arising from any use of this document or any solicitations of an offer to buy or sell any securities. Kenanga Investment Bank Berhad and its associates, their directors, and/or employees may have positions in, and may effect transactions in securities mentioned herein from time to time in the open market or otherwise, and may receive brokerage fees or act as principal or agent in dealings with respect to these companies.

Published and printed by: KENANGA INVESTMENT BANK BERHAD (15678-H) Level 12, Kenanga Tower, 237, Jalan Tun Razak, 50400 Kuala Lumpur, Malaysia Chan Ken Yew Telephone: (603) 2172 0880 Website: www.kenanga.com.my E-mail: [email protected] Head of Research

shipping, ports & logistics neutral...2017/07/07 · shipping, ports & logistics sector...

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