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This article first appeared in The Edge Financial Daily on January 7, 2020

Port and logistics sector
Maintain neutral:
The third quarter of 2019 was also dull but generally satisfactory for port players with MMC Corp Bhd and Westports Holdings Bhd broadly within expectations. Westports’ earnings, within expectations, were underpinned by a higher throughput of 16% led by transhipment (+20%) and gateway (+8%) more than offsetting a lower conventional (-9%), with a flattish operating expenditure.

MMC’s earnings were anchored by stable port operations and construction and tunnelling works for the Mass Rapid Transit Line 2.

However, Pos Malaysia Bhd remained in the red, missing expectations again as losses widened, dragged by its postal service.

After bottoming out from a reshuffling of shipping alliances’ tail end residual effects, Port Klang’s container throughput has been recovering since financial year 2018 (FY18).

Notably, Westports, with a “market perform” rating and a target price of RM4.15, posted a commendable throughput growth of 16% year-on-year for the cumulative nine months of 2019, largely driven by the intra-Asia segment’s continued growth coupled with an increase in the Ocean Alliance’s calls in its Asia-Europe segment.

Trade diversions caused by the ongoing US-China trade war also helped spur the group’s higher margin gateway segment (+10%).

Separately, Westports is expanding the Westports 2, with land reclamation works anticipated to commence in FY20. While we believe Westports’ expansion plans are on track for future trade volume growth, we reiterate our view that the expansion project is a longer-term prospect with full completion by 2040.

In the near to medium term, we believe the crowded parcel delivery space would likely remain saturated until an intensifying competition squeezes out smaller players, leading to an industry consolidation in the longer term.

Pos Malaysia has reported yet another quarter of losses of RM29 million, weighed down by a persistent double-digit contraction in mail volumes.

While the group is still hoping for a tariff hike, we believe losses are likely to balloon moving forward, premised on its inability to close post offices, underperforming segments and a unionised workforce.

Pos Malaysia’s courier business is expected to still dampen earnings, until an eventual break-even likely in FY21. All in, we opt to stay on the sidelines for this sub-sector as we await a meaningful earnings recovery, most likely from companies maturing from their expansion gestation phases and the industry’s eventual consolidation.

Our “neutral” rating is maintained, given a lack of near-term rerating catalysts. Within our coverage, we reiterate our “market perform” call for MMC and Westports as we believe they are already fairly valued.

Pos Malaysia has an “underperform” rating given its bleak outlook, likely dragged further by its widening costs due to its responsibility in providing postal coverage to the entire country. — Kenanga Research, Jan 6

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