Saturday, October 19

Weakness in logistics players’ earnings growth to persist

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KUCHING: Earnings growth weakness within the logistics space is expected to persist for the next one to two years while parcel delivery players are expected to continue recording top-line growth amid the burgeoning e-commerce trend in the country.

The research arm of Kenanga Investment Bank Bhd (Kenanga Research) viewed the recent round of poor results among logistics players to be a larger indication of underlying weakness in earnings growth.

Moving forward, Kenanga Research expected the weakness in earnings growth among industry players to continue for the next one to two years, mainly underpinned by increased competition within the industry, leading to margins suppressions, coupled with higher running costs arising from expansions and new ventures, with most industry players currently having expansion plans or new ventures in their pipelines.

With that said, the research arm noted that main drivers towards a recovery in earnings growth for logistics players are mainly consolidation activities within the industry, resulting in dampened competitiveness among players, Other main drivers include strong growth in domestic economy to drive volume growth and expansions and new ventures to grow beyond current infancy phases to potentially turn earnings-accretive.

“Elsewhere, port operators are also expected to see weaker earnings for the remainder of the year, with Westports suffering from throughput decline from reshuffling of global shipping alliances,” it said.

It highlighted that Bintulu Port Holdings Bhd is also expected to see a weaker second half of 2017 (2H17) due to increased costs from the commencement of Samalaju Port, while MMC Corporation Bhd is also expected to show weaker financial year 2017 (FY17) earnings due substantial completion of KVMRT Line 1 coupled with absence of land sale in Senai Airport Free Industrial Zone.

As for parcel delivery players, while top-line is expected to continue growing, Kenanga Research believed that the sub-sector could see suppressed margins going forward, due to increased competition within the industry.

“As such, top-line growth may not entirely cascade into bottom-line growth moving forward,” it said.

“Many of the competitions consist of smaller start-ups and non-listed players, often positioning themselves competitively in-terms of pricing in order to gain market share from established players.”

From Kenanga Research’s understanding, Pos Malaysia Bhd (Pos Malaysia) and GD Express Carrier Bhd (GD Express) still hold the top-two positions in terms of market share, despite continuous pricing pressures.

Of the two, the research arm still believed GD Express to be the better earnings proxy for e-commerce, given the group’s pure-play parcel delivery business model, while Pos Malaysia’s earnings will continue to be dragged by its declining postal mail and retail businesses for the foreseeable future.

However, the research arm opted to stay sidelined from this sub-sector for now due to lofty valuations, with GD Express and Pos Malaysia currently trading at forward price earnings ratios (PERs) of 102-fold and 35-fold, respectively.

On ports, Kenanga Research expected container throughput to record a circa 10 per cent drop in FY17.

However, with that being said, the research arm believed that FY17 shall serve as a new base for organic growth.

“As such, we are expecting to see some recovery in throughput in FY18 and beyond, underpinned by expected growth in gateway volumes, gradual recovery of transhipment as post-reshuffling business environment stabilises and overall domestic economic growth,” it said.

Meanwhile, Kenanga Research noted that the Hurricane Harvey has caused a short-lived gain in charter rates in September, but such hikes are not bound to be sustainable.

The research arm further noted that overall, tanker rates are still on a declining trend dragged by higher tanker fleet growth and sluggish tonnage demand.

“Having said that, stepping into the fourth quarter of 2017 (4Q17), rates improvement is expected from 2017 low with seasonal pick-up as the winter season kicks in,” it noted.

Kenanga Research pointed out that thus far, VLCC, Suezmax and Aframax average spot rates in September have fallen almost by half year on year (y-o-y).

It also noted that such weakness could persist if the Organisation of Petroleum Exporting Countries (OPEC) extends its production cut beyond March 2018, which will likely be concluded by the next regular OPEC meeting in November this year.

“On the flip side, liquefied natural gas (LNG) spot rates have rebounded circa 50 per cent from its 2017 low, strongly underpinned by improving flow of volumes, especially from Australia and US to countries such as China, Taiwan and South Korea.”

Overall, the research arm saw limited catalyst in its sole shipping coverage, MISC Bhd in the near term but the group’s balance sheet remains healthy with net gearing of 0.2-fold, allowing it to seek opportunistic brown field replacement projects, shallow-water assets requirement in the region as well as to grow its fleet size upon weakness in asset value.