The shift in post-pandemic global consumption trends, which now favour services over goods, may bring about the risk of weakening throughput volumes for Westports.
Throughput volume growth in Malaysia’s major ports, Port Klang and Port Tanjung Pelepas, softened slightly in financial year 2022 by -0.1% and -0.6%, likely due to the easing of congestion at the country’s ports.
“We expect trade flows to only see a more prominent impact from China’s reopening in second half 2023, as the country is Malaysia’s largest trade partner and a key contributor to global port growth,” said RHB Research (RHB) in the recent Malaysia Sector Update Report.
Note that China had the second highest number of inbound tourists to Malaysia in 2019. We see encouraging initiatives by the government and MAHB to increase Malaysia’s visibility as a travel destination to meet the target of 5 million tourist arrivals from China in 2023.
RHB looks forward to a few key events in mid quarter two 2023, such as the finalised gazetted passenger service charges and loss capitalisation mechanism in the third consultation paper, as well as the new operating agreement with the government.
RHB continues to advocate investors to choose well-strategised service providers within the sector. RHB favours TASCO for its strong global presence, which allows the group to expand into the fourth-party logistics business, handling the entire supply chain management for its key client.
Leveraging on its parent’s proprietary software solution and network, it aspires to further grow its supply chain solutions business, which is currently 2% of group revenue and maintain client stickiness. In view of freight rate normalisation, earnings would be cushioned by its ability to lock in ocean freight rates with its customers and to negotiate with shipping lines for better margins and volume certainty.
This would also help provide earnings visibility, compared to the elevated freight rate era, where it was mostly short-term arrangements. Its well-diversified business model with strengths in the contract logistics and cold chain segments, coupled with the integrated logistics solutions tax incentive should sustain its overall profitability.
Risks identified by RHB are the resurgence of COVID-19 variants leading to lockdowns, slowdown in global economic growth, dampening trade flows, slower-than-expected recovery in passenger and trade volumes, and further weakening of freight rates.
