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Logistics sector resilient despite lingering macroeconomic and geopolitical risks

Logistics sector resilient despite lingering macroeconomic and geopolitical risks

06 Nov 2023

HAVING contended with supply chain disruptions during the Covid-19 pandemic, logistics players are now facing challenges that are tied in large part to macroeconomic volatility, such as rising inflation and high interest rates, and geopolitical conflicts, which threaten to impact trade flows and leave shippers uncertain of their next move.

S&P Global Market Intelligence expects global real gross domestic product (GDP) to increase 2.6% in 2023, with growth easing to 2.3% in 2024, amid the risk of a prolonged period of weakness increasing. The ongoing Israel-Hamas conflict adds to the already elevated economic uncertainty.

Nevertheless, for most local logistics companies, cargo handling volume in Malaysia has held steady so far this year and has not been impacted by the conflict in the Middle East, thanks to their low exposure to Israel. In fact, they are anticipating a pickup in demand in the second half of the year, which is historically stronger than the first half.

Westports Holdings Bhd CEO Eddie Lee Mun Tat says the supply chain disruption, which reached crunch levels in 2021 with shipping containers and ships stuck in logjams in ports around the world, is now over.

“Everything is back to normal. As for our port performance, we are fortunate that our import and export boxes have continued to hold up since the pandemic. One of the reasons is that many companies are setting up factories in Malaysia,” he says, adding that the US-China trade tensions have pushed Chinese companies to move manufacturing to places like Malaysia.

“Even in the last quarter of this year and moving into the next quarter [in 2024], we still see a few new production lines being built here. So, we are benefiting from this despite the global uncertainty,” he tells The Edge.

According to Lee, the port operator is expecting to record single-digit container volume growth for 2023, up from 10.05 million TEUs (20ft equivalent units) last year. In 1H2023, Westports’ container volume grew 7.4% year on year (y-o-y).

In an Oct 23 report, Maybank Investment Bank says it is optimistic about the outlook for Westports, supported by continued growth in intra-Asia trade, while rising foreign direct investments in Malaysia will support its gateway volume growth.

Still, Lee is worried about the sharp increase in global oil prices amid the conflict in the Middle East. “Diesel constitutes a substantial part of Westports’ operating costs. We use diesel for our 200-odd rubber-tyred gantry (RTG) cranes and 600-odd terminal tractors.”

To reduce diesel usage, Westports has acquired several electric autonomous vehicles, but he notes that the transition to sustainable transport “will take a while”.

Swift Haulage Bhd group CEO Loo Yong Hui says the overall slowdown in global trade continues to be a concern, given that Malaysia is a trading nation. “That said, this is not a challenge that is unique to us as all the other players and sectors are similarly affected,” he adds.

Loo sees Swift Haulage’s financial performance picking up in the second half of this year, which is traditionally stronger than the first half. “We typically achieve 60% of our total yearly profit in the second half.”

And the company is confident of closing FY2023 on a positive note.

“Internally, we always aim for y-o-y growth. This growth is likely to be driven by more mature contributions from the ongoing investments in new warehouses and our fleet expansion. Earnings drivers for the group will be the same as in previous financial years, with the haulage and land transport segment contributing to more than 75% of the total group revenue,” he says.

The integrated logistics services provider saw a 28% decline in net profit to RM19.85 million in the first six months ended June 30 (1HFY2023) from RM27.5 million a year earlier, on higher finance cost and depreciation expense.

Swift Haulage is the largest haulage player in the country, with more than 1,500 prime movers. “The demand for our services is expected to be maintained as our large fleet and wide network are preferred by large multinational corporations (MNCs), which account for the majority of our clients,” says Loo.

Warehousing remains the bright spot

For most logistics players, the warehousing segment stood out as a bright spot during the pandemic.

“Notably, the demand for specific warehouses in good and strategic locations is higher than ever. We are capitalising on this by building a new warehouse in Pulau Indah, Selangor, that will come on stream in the next year or so. Having been on an expansion spree for the last two years, our warehousing capacity currently stands at about 1.3 million sq ft,” says Loo.

The group will continue to allocate capital expenditure (capex) for FY2023 and FY2024 to expand its warehouse capacity, buy electric prime movers and develop its IT systems. But it has no plans to raise funds from the capital market, says Loo, noting that it is well funded with a good combination of internal funds and borrowings.

At end-June, Swift Haulage’s cash and equivalents stood at RM43.64 million, while borrowings totalled RM690.91 million. Its net gearing was 0.97 times.

Meanwhile, Tiong Nam Logistics Holdings Bhd has earmarked RM376.4 million in capex for FY2024 and FY2025 (ending March 31) to extend its warehouse network to meet the growing demand for logistics solutions. The expansion will bring the group’s total warehousing capacity to 9.3 million sq ft in FY2025, up more than 30% from 6.8 million sq ft as at June 30, 2023.

Ong Yoong Nyock, founder and managing director of Tiong Nam, says the capex allocation will be financed with internal funds and bank borrowings.

“Our balance sheet remains healthy and conducive for our growth plans. Our primary focus is on expanding the logistics and warehousing segment, with over 90% of the total projected capex allocated to warehouse expansions,” he tells The Edge in an email reply.

“This expenditure includes the mega warehouse facility slated for lease to Mercedes-Benz Parts Logistics Asia-Pacific, as well as three warehouses currently under construction and two upcoming warehouses in Johor, Kedah and Singapore. These initiatives are scheduled for completion in FY2024 and FY2025, with the balance capex allocated to vehicle purchases.”

Tiong Nam, which offers full-fledged and integrated logistics and warehousing services, has 95 warehouses and distribution centres across Malaysia, Thailand, Singapore and Laos. Its warehouse utilisation rate was close to 90% as at end-June.

On its plans for a warehouse real estate investment trust (REIT) spin-off listing, Ong says he is currently in discussion with an investment bank for the exercise. “Any progress related to this listing will be communicated at a later time,” he adds without elaborating.

Ong has a positive outlook for the logistics and warehousing sectors for the remainder of 2023 and 2024, on the back of Malaysia’s GDP rebounding to pre-pandemic levels. The local economy is anticipated to grow 4% to 5% in 2023, with the positive outlook continuing into 2024.

“There is growing demand for comprehensive total logistics services as companies increasingly outsource logistics management to reliable service providers and concentrate on their core operations. As the country’s largest land logistics and warehousing service provider, our services are crucial to support the business supply chain and the reliable delivery of goods across industries in the country, while enhancing regional connectivity,” he says.

Tiong Nam started its new financial year ending March 31, 2024 (FY2024) on a promising note, with its net profit rising 96% y-o-y to RM747,000 in 1QFY2024, while revenue grew 8% y-o-y to RM192.79 million.

At end-June, the group’s deposits and bank and cash balances stood at RM12.82 million, while its total borrowings came to RM1.34 billion. It had a net gearing of 1.5 times.

Ong says the performance of the property development segment, which accounted for 10.5% of the group’s revenue in 1QFY2024, led to the earnings improvement. This was supported by healthy property sales at its Kota Masai housing development in Johor. The segment’s contribution helped to partially offset the logistics and warehousing services segment’s increased operational costs, including higher staff expenses, depreciation and finance costs due to ongoing warehouse expansions.

The group is anticipating favourable growth in the property development segment in FY2024, with increased contribution to the group. “Our confidence is reinforced by the encouraging 71% take-up rate recorded as at June 30, 2023, for Phase 1A1 of the Kota Masai project, which commenced in December 2022. We are optimistic that this success will extend to the second phase, Phase 1B1, launched in June 2023,” says Ong.

Phase 1A1 of the Kota Masai development comprises 91 units of two-storey homes with a gross development value (GDV) of RM43.6 million. Phase 1B1 has 58 shoplots with a GDV of RM59 million. The project’s unbilled sales stood at RM4.1 million as at June 30.

However, the logistics and warehousing services segment will remain the group’s primary growth driver in FY2024 as it makes up the majority of its revenue.

“Our property development segment is a minor contributor. We do not have plans to spin off the segment,” says Ong.

“Furthermore, we are nearing a significant milestone as we have secured the certificate of completion for our mega warehouse for use by Mercedes-Benz Parts Logistics Asia-Pacific, with leasing operations set to commence in November 2023. This facility is the largest warehouse in our portfolio and will provide long-term recurring income. We foresee that it will contribute positively to our financial performance in FY2025.”

For FY2024, Tiong Nam is positive of achieving better performance compared with the year before, as demand for logistics and warehousing services remain healthy, while the property development segment is expected to complement earnings. But the group is unable to provide a specific forecast at this point due to the global uncertainties.

“Our revenue has been growing steadily, achieving a record high of RM725.7 million in FY2023, mainly attributed to increased business from existing customers and addition of new customers, including MNCs that rely on our reliable and quality services,” says Ong.

“However, we remain mindful of global conditions that could pose a short-term impact on the local economy. Nevertheless, we believe the sector’s long-term prospects remain robust.”

Tiong Nam faces challenges in recruiting and retaining skilled workers in Malaysia, as well as higher operating costs due to the rising interest rates and higher wages.

“Nevertheless, we remain dedicated to effectively addressing these challenges through improved resource allocation, cost management and enhanced operational efficiency. Additionally, the costs associated with our ongoing expansions will be effectively managed through a prudent approach of aligning the pace of expansion with market demand,” says Ong.

Today, Tiong Nam’s clients comprise major domestic and world-renowned brands, including from the food and beverage, IT, electrical and electronics (E&E) and trading sectors.

Correction in freight rates erodes profits

After a soft start to 1QFY2024 ended June 30, Tasco Bhd has seen an uptick in shipment volumes and expects a 10% to 15% increase in the volume of shipments handled in the financial year ending March 31, 2024 (FY2024).

Its deputy group CEO Tan Kim Yong says the integrated logistics solutions provider remains on track to hit the RM1 billion revenue mark in FY2024, although it may be difficult to repeat the record performance in FY2023. The group reported a net profit of RM90.8 million in FY2023, up 39% from RM65.25 million in the previous year, as revenue rose 8% to RM1.61 billion from RM1.48 billion.

According to RHB Research, the sharp correction in both air and ocean freight rates since 2022 has eroded the profitability of all freight forwarders such as Tasco and FM Global Logistics Holdings Bhd. Nevertheless, FM Global’s domestic businesses such as third-party logistics (3PL), warehousing and support services should continue to bolster the group’s earnings, it says in an Oct 3 report.

The latest Drewry World Container Index, which measures the cost of shipping a 40ft equivalent unit (FEU) container in eight major routes to/from the US, Europe and Asia, stood at US$1,364 per FEU on Oct 19, indicating that it is now 4% below the average rate of US$1,420 in 2019 and the lowest in three years.

Tan says the downside risks mainly hinge on macroeconomic headwinds. “Fortunately, most of our freight shipments are intra-Asean and to Australia. Also, our clients in certain sectors are still doing well,” he adds.

“We don’t know how the war between Israel and Hamas will affect the Malaysian market. For us, we don’t have a lot of business in that region.”

RHB Research likes Tasco for its diversified client base and business segments that will sustain its earnings base, as well as the integrated logistics services tax incentives that offer a buffer against sectoral headwinds.

Tasco is also expanding its warehouse space.

According to RHB Research, the group’s four-storey, 600,000 sq ft logistics centre in Shah Alam, Selangor, is expected to be handed over to its E&E and retail customers in 4QFY2024. Meanwhile, its new 250,000 sq ft Westports logistics centre expansion should be completed by November, which will provide a growth catalyst for FY2024 and FY2025.

In an Oct 3 report, the local research firm expects Tasco to register a much better performance in 2HFY2024 with the maiden contribution from new warehouses, which should fetch a wider margin than that of its rented warehouse. 

Source: The Edge Malaysia