Thursday 3 January 2013

2013 STRATEGY – TRANSPORT (NEUTRAL)


2012  a  muted  year.  2012  proved  to  be  a  challenging  year  for  transport  and  logistics  stocks, notably aviation and shipping. The earnings reported by the airlines failed to spring any pleasant surprises while the shipping segment continued to see an imbalance in the demand and supply of  tanker  and  dry  bulk  vessels,  which  further  weighed  on  the  already-depressed  charter  rates. Meanwhile, cargo throughputs handled by the ports took a hit as exports dwindled due to China’s moderating  economic  growth  and  concerns  over  the  European  debt  crisis.  Thus,  despite  the fairly positive consumer sentiment locally, local logistics operators also found themselves facing some uncertainty.

Airlines  to  face  more  competition  in  2013.  Our  Overweight  call  on  the  aviation  subsector  in 2012  proved  to  have  been  a  miss  due  to  news  of  the  emergence  of  a  new  domestic  low  cost airline  in  mid-March  2013.  The  new  low  cost  carrier,  Malindo,  is  a  JV  between  Lion  Air, Indonesia’s largest low cost carrier,  and  a  local  company,  National  Aerospace  &  Defence Industries SB. Malindo will, in its first year of operation, commence with a fleet of 12 aircraft and gradually  expand  to  100  aircraft  within  the  next  decade.  This  could  put  pressure  on  the passenger yield of AirAsia and Malaysia Airlines (MAS), and hence dampen their profits. We see this  having  a  bigger  impact  on  AirAsia,  it  being  a  direct  competitor  serving  the  same  low  cost segment.  MAS,  meanwhile,  has  its  own  problems  in  turning  around,  having  recently  unleashed another cash call - its third since 2007. The best aviation bet is airport operator Malaysia Airports (MAHB),  which  is  the prime  beneficiary  of  higher  aircraft  and  passenger  traffic.  These,  coupled with the expansion of its non aeronautical revenue from a bigger rental space and higher rental collected, would see the company turning free cash flow positive in 2014 after years of being in the red. 

Anaemic recovery for shipping, logistics. Shipping underperformed yet again, hit by a glut of vessels – ranging from dry bulkers to chemical and crude tankers – as well as the frail recovery of the global economy. While the resilience of steel prices bolstered vessel demolition activities and  helped  ease  capacity,  we  believe  that  the  overall  shipping  sector  will  be  the  last  transport subsector  to  see  a  meaningful  recovery,  for  which  we  see  only  materializing  in  2H 2014  at  the earliest. Hence, in the near term, time charter equivalent rates will continue to stay depressed, as well as sandwiched by higher bunker costs due to the stubbornly high oil prices. The IMF expects the  global  economy  to  remain  sluggish  going  into  next  year,  and  this  will  also  weigh  on  vessel demand.  The  outlook  for  ports  and  logistics  operators  will  be  a  cautious  one,  with  exports  and imports  potentially  coming  in  below  expectations  as  it  did  this  year,  due  to  the  twin  effects  of China’s slowdown  and  Europe’s debt crisis,  although  this  could  be  offset  by  improved  intraregion  trade.  For  stocks  in  the  shipping  space,  the  worst  may  be  over  for  MISC  following  the disposal of its ailing container liner operations, while we favour port operators like NCB, for which the impending listing of its competitor Westports may prompt a potential valuation rerating.

Maintain  NEUTRAL.  Our call on TRANSPORT remains a NEUTRAL. For subsector weighting, we  believe  Aviation  still  holds  more  promise, especially  after  the  sell-down  of  Malaysia Airports and  AirAsia,  although  there  may  be  an  overhang  over  the  latter’s  share  price  until  investors assess  its  new  competitive  landscape.  We  also  like  the  logistics  subsector  as  its  earnings  are more insulated against intra-regional factors. Our sector top pick is MAHB.
Source: OSK

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