Transportation, logistics cut to underweight on Covid-19 damage

KUALA LUMPUR: AmInvestment Research downgrades its call on the transportation & logistics sector to Underweight from Neutral due to the severe impact from the Covid-19 pandemic.

In its report issued on Thursday the research house said it has become increasingly clear that the damage inflicted by the Covid-19 pandemic to the sector is no mere dent but destruction of varying degrees to different segments.

“It has resulted in a steep contraction in port throughput, a total collapse in demand for air travel and disruption to logistics services, particularly international mails and parcels, ” it said.

Ports: The segment has been hit at both the demand and supply sides.

On the demand side, the pandemic has hurt global consumption and investment, resulting in lower shipping volumes and hence container throughput at the ports.

On the supply side, global manufacturers have been operating with sub-optimal utilisation as their suppliers along the supply chain have been affected in varying degrees by the pandemic. Lower factory production has translated to less cargoes handled at the ports.

In fact, the ports have also suffered a disruption on the supply side, i.e. backlogs at the ports as some stevedores and truck drivers are unable to return to work.

“We project container throughput to contract by 15% at Westports (Hold, RM3.81) and 10% at ports of MMC Corporation (Buy, RM1.13) in FY2020F.

“This will be consistent with: (1) the steep swing in global GDP growth from +2.9% in 2019 to -3.0% in 2020F as projected by International Monetary (IMF) and (2) a 10% contraction in demand for global container shipping in 2020F and (3) the deteriorating world PMI outlook, ” it said.

AmInvestment Research said the Copenhagen-based shipping consultant SeaIntelligence ApS projected the contraction in global container shipping would be dragged down largely by the Asia-Europe and trans-Pacific trades.

“However, on a brighter note, we project container throughput at Westports and ports of MMC Corporation to bounce back by +10% and +8% respectively (from a low base) in 2021F, ” it said.

This was based on an assumption that by then the pandemic will have been significantly contained or vaccines will have been developed and made available, resulting in a recovery in global GDP projected at +5.8% by the IMF.

“We are more inclined to be in the ‘U-shaped recovery camp’ as far as seaport container throughput is concerned. We only expect container throughput to recover to the pre-Covid-19 level in 2022F.

“Over the longer term, we view positively the outlook for ports in the region (Malaysia included), underpinned by rising investment in the manufacturing sector that generates tremendous inbound (feedstock) and outbound (finished product) throughput for ports, ” it said.

AmInvestment Research pointed out there have been significant relocations of the manufacturing base by multi-national 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 relation.

Air travel: The global air travel industry has come to a complete halt as countries across the globe have imposed restrictions on air travel since March 2020 to contain the spread of Covid-19.

While certain countries are now easing lockdowns and reopening their economies gradually, they are not rushing into restarting cross-border air travel.

According to popular real-time flight tracker FlightRadar24, commercial flights worldwide plunged 73.7% YoY in Apr 2020.

Locally, the Malaysian Aviation Commission (Mavcom) in end-March 2020 slashed its 2020 air passenger traffic grow forecast for Malaysia to -36% to -38% (from +4% to +5% previously).

“We project passenger volume for AIRASIA (Sell, 43 sen) to shrink by 35% YoY in FY20F, followed by a 25% rebound in FY21F from a low base (again, assuming that by then the pandemic will have been significantly contained or vaccines will have been developed and made available), ” it said.

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