The sector’s earnings delivery (versus our expectations) saw a slight deterioration in the recently concluded 2QCY24 reporting season, as shipping disruption arising from the Red Sea conflict caused yard congestion that restricted movement within and out of the ports. We maintain our NEUTRAL stance on the sector due to the disruption to global trade, especially in the AsiaEurope sector, from the shipping diversion from the Red Sea. The World Trade Organisation (WTO) in Apr 2024, cut its projection for global merchandise trade volume growth in CY24 to 2.6% (from 3.3%), also quoting lower water levels in Panama Canal due to an extreme drought that is disrupting the movement of shipping liners (which has only started to ease recently). We also acknowledge that global trade will have to navigate stricter regulations on carbon emissions. On balance, we continue to see a bright spot in the domestic logistics sector, which is a beneficiary of the booming e-commerce. We do not have any top picks for the sector.

The sector’s earnings delivery (versus our expectations) saw a slight deterioration in the recently concluded 2QCY24 results season with 50% and 50% meeting and missing our forecasts, as opposed to 25%, 50% and 25% beating, meeting and missing our forecasts in the preceding quarter. BIPORT (MP; TP: RM6.55) and WPRTS (UP; TP: RM3.80), met our expectations but POS (UP; TP: RM0.30) and SWIFT (MP; TP: RM0.50) disappointed.

BIPORT’s core net profit almost doubled YoY driven by strong cargo volumes in both Bintulu Port due to the recovery in LNG demand from China (which started in 4QFY23), and Samalaju Industrial Port from a pick-up in cargo volumes from key customers, i.e. PMETAL (OP; TP: RM6.35) and OMH (OP; TP: RM1.80), as well as lower finance cost and reduced effective tax rate under an interim lease arrangement (from Jul 23 to Dec 2024) for Bintulu Port.

Meanwhile, WPRTS saw a stronger top-line growth due to a stronger container volume with improved yields, mainly from robust gateway container volume in the 1QFY24 which was partially offset by reduced volume in the 2QFY24 due to yards congestion. However, transhipment volume continued to weighs on the prolonged war in the Middle East with no immediate sign of the Red Sea conflict de-escalating. Nevertheless, its earnings rose significantly, thanks to better mix skewed towards higher-margin gateway cargoes and lower finance costs.

On the other hand, POS‘s results disappointed on poor cost containment, with its core net loss plunging further into the red. The deteriorating operating environment at its postal segment and logistics services negated the recovery at its aviation service. Its postal sales continued to be affected by slowdown in online shopping and lower demand from major e-commerce players that were investing in in-house delivery capabilities (for instance, Shopee Express of Shopee).

SWIFT disappointed as stronger top-line growth was negated by higher-than-expected start-up costs from its new warehouse in Westport and loss of operational scale at its container depot and freight forwarding businesses due to global shipping disruptions arising from the Red Sea conflict. Furthermore, its 2QFY24 was affected by the ports yards congestion which restrict movement within and out of the ports despite a slight recovery from warehousing and container depot segment with the increased capacity utilisation by new customers

The shipping diversion from the Red Sea continues to weigh down on global trade, especially in the Asia-Europe sector. The diversion from Suez Canal to the Cape of Good Hope has resulted in a longer voyage for the Asia-Europe route (which contributes to 30% of global container volume), reducing the frequency of calls shipping lines could make at WPRTS’s ports (and all other ports in the region). The WTO in Apr 2024 cut its projection for global merchandise trade volume growth in CY24 to 2.6% (from 3.3%), also quoting lower water levels in Panama Canal due to an extreme drought that is disrupting the movement of shipping liners. The drought, however, has started to ease in September 2024 which is in line with the WTO expectation of the second half of the year in recovery in movement of shipping liners.

We also 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 for Westports), especially those originating from China, which is a major exporter of iron, steel and aluminium to the EU.

• 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.

• 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. On a more positive note, 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.

We maintain NEUTRAL on the sector and do not have any top pick for the sector

Source: Kenanga Research - 19 Sept 2024