AmInvest neutral on transport sector but positive on seaports

AMINVESTMENT Bank (AmInvest) is neutral on the outlook for the transportation sector in 2020 but is positive on the prospects for airlines and airport operators on the back of tourist arrivals during Visit Malaysia Year 2020 (VMY2020). It is also bullish on the prospects for port operators.

Tourist arrivals are projected to reach 30 million in 2020 (+12% yoy versus annualised 9M2019 tourist arrivals of 26.8 million) by Tourism Malaysia in conjunction with VMY2020.

For port operators in Malaysia, the research house is forecasting a container volume growth of 4%-5%, in line with a projected compound annual growth rate (CAGR) of 4.5% in 2019-2024 for international containerised trade by the United Nations Conference on Trade and Development.

It said it is confident that the tourist arrivals figure by Tourism Malaysia is achievable. The weak ringgit and “tourist diversion” to Asean destinations (Malaysia included) from Hong Kong amid unabated political unrest and protests are the pull factors.

AmInvest added that the positive outlook for Malaysia’s tourist arrivals will be a tailwind to AirAsia Bhd’s key strategy to aggressively grow its top line to mitigate the higher cost structure arising from (1) the sale and leaseback of its aircraft and (2) the high start-up costs of its digital ventures.

The outlook for the port sector in the region (Malaysia included) is resilient, underpinned by global trade and investments in the manufacturing sector that generate large inbound (feedstock) and outbound (finished product) throughput for ports. There have been significant relocations of the manufacturing bases by multinational companies from China to the region due to the rising labour and land costs, exacerbated by the US-China trade war.

An added competitive advantage of seaports in Malaysia is its low port charges, bolstered further by a weak ringgit.

The research house said global shipping lines will have to step up their cost-cutting initiatives on the back of slowing business amid a global economic slowdown. Also not helping is the much more stringent International Maritime Organisation 2020 sulphur cap (sulphur content of fuel used) that will come into effect from Jan 1, 2020, exerting further upward pressure on the operating cost of shipping lines.

The growth in local seaports will be underpinned by expansion plans – a new liquid bulk jetty and eight new container terminals (CT10 to CT17) (that will double their handling capacity from 14 million to 28 million TEUs by 2040) and new triple-Ecranes and development of autonomous driving terminal tractors (a joint venture with Terberg Tractors Malaysia) at Pelabuhan Tanjung Pelepas.

As for the logistics sector, the local e-commerce sector is expected to expand rapidly with Fitch Solutions projecting a CAGR of 14% in 2018-2022 while the government is even more optimistic with its 20% projection. The online shopping segment, for instance, has created huge opportunities for parcel delivery service providers such as Pos Malaysia and GDex.

However, the sector is weighed down by overcrowding of participants (116 as at November 2019), resulting in cutthroat competition and severe squeeze in margins of the service providers. In addition, service quality is an issue, particularly the inability of logistics player to cope with a sudden surge in volume (during promotional periods by e-commerce operators).

This can be seen during the recent 11.11 promotion where Shopee (one of the biggest e-commerce players in Malaysia) clocked up sales of 70 million items, as compared with a combined maximum sorting capacity of the two largest logistic players in the region (Pos Malaysia and GDex) of only 710K pieces per day.

The research house said it may upgrade its recommendation on the sector if volume performance (such as passenger traffic, cargo throughput and mail/parcel volume) beats expectations; yields surprise in the upside on reduced competition; and fuel cost (jet fuel for airlines and diesel for seaport operators) comes down on weaker crude oil prices.

It added that it may downgrade the sector if volume performance (such as passenger traffic, cargo throughput and mail/parcel volume) misses expectations as a result of escalated trade war and other geopolitical risks; yields surprise on the downside on heightened competition, and fuel cost (jet fuel for airlines and diesel for seaport operators) rise on stronger crude oil prices.

It has a buy call on Westports Bhd with a fair value of RM4.81 and MMC Bhd with a fair value of RM1.58. It believes the seaport operators are beneficiaries of the trade diversion from the US-China trade war. Also helping is the resilient outlook in the region’s port sector, underpinned by investments in the manufacturing sector that generate large inbound and outbound throughput, coupled with the weak currency and cheaper port charges. – Dec 27, 2019

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