WHILE the transportation and logistics sector is expected to improve as the global economy opens up amid Covid-19, recovery will be a rough journey for certain players in the sector, warns AmInvestment Bank (AmInvest).
“The recovery of global trade augurs well for the port segment. However, the air travel industry faces a bumpy path given the uncertainties surrounding the opening of borders and recapitalisation plans of airlines.
“While the logistics segment is technically a beneficiary of the pandemic, particularly parcel delivery on the back of the boom of online shopping, it is weighed down by a crowded playing field with cutthroat competition,” said AmInvest, who maintains an underweight call on the sector.
For ports, the outlook remains resilient, according to the research house, backed by rising investments in the manufacturing sector, which generates tremendous inbound and outbound throughput for ports.
“There have been significant relocations of manufacturing bases by multinational companies out of China to other parts of the world, including the region as they rethink geographical diversification/supply chain concentration risk, coupled with the rising labour and land costs in China and the volatile US-China relations,” said AmInvest.
At the same time, the International Monetary Fund (IMF) projects the global economy to rebound by 5.4% in 2021F after contracting by 4.9% in 2020F.
“Already, business confidence globally as indicated in purchasing managers’ indices (PMI) has shown upticks in recent months, as economies, businesses and borders reopen. The global economic recovery shall translate into more robust global trade, and hence higher throughput at the seaports.
“We also draw comfort from the absence of any major cancellation of shipbuilding orders thus far, indicating the players’ optimism on the recovery in the global container shipping trade,” said AmInvest.
Air travel, on the other hand, has started seeing recovery, noted the research house, indicated by the increase in global daily commercial flights since April 2020 on the back of easing travel restrictions globally.
“However, the recovery of the air travel industry will be bumpy given the uncertainties surrounding the opening of borders. We understand that airlines are struggling to plan their flight schedules as passengers now on average book their tickets only 0 to 3 days before departure, compared to 20 days and above previously,” said AmInvest.
This is not helped by the urgent need for airlines to recapitalise their balance sheets, given the massive losses suffered from the collapse in air travel since the pandemic, added the research house.
AmInvest also maintains its view that AirAsia Group Bhd’s key strategy of aggressive top line growth, to mitigate the high cost structure from its recent aircraft sale and leaseback scheme, has been “thwarted by the collapse of the air travel market, and the expected long and winding recovery road of the industry.”
For logistics, the research house believes the parcel delivery segment has emerged as a winner, due to the pandemic and the resultant social distancing accelerating consumers towards online shopping channels.
“Based on research data by e-commerce ecosystem player Commerce.Asia, the value of merchandise sold via e-commerce in Malaysia surged 149% year-on-year in 1Q20 amid the pandemic. The growth in e-commerce sales translates to rising volumes of parcels handled by parcel delivery companies such as Pos Malaysia Bhd and GD Express Carrier Bhd,” said AmInvest.
However, the research house also noted that the sector has low entry barriers, leading to a crowded playing field with 111 players as of June 2020.
“This has given rise to cutthroat competition resulting in a severe squeeze in margins. We believe the overcrowded situation could get worse in the short to medium term given more new entrants funded by venture capitalists who want to jump on the bandwagon of the e-commerce boom,” said AmInvest.
The research house also noted that the incumbents to the courier segment are expanding as well. Pos Malaysia has plans to double its daily automated parcel processing capacity by 2025 to improve economies of scale, while scaling up last-mile delivery through crowdsourcing and an entrepreneurship programme, according to AmInvest.
“Meanwhile GDex, currently with an average sorting capacity of 130,000 parcels per day, has also allocated RM40 mil for expansion of its automated sorting hub,” added AmInvest.
The research house’s top pick for the sector as a whole is MMC Corp Bhd, seeing it as a recovery play given the expected improvement in port throughput over the next six to 12 months as economies reopen. – July 22, 2020
