Transport & Logistic - A Quiet Start To An Overall Exciting 2013

We are maintaining our NEUTRAL call on the Transportation sector due to the limited upside on its valuation and the fact that 1Q13 is a generally weak season for the sector, especially for airlines. However, 2013 should be an eventful year for the airlines, especially for AIRASIA (MP; TP: RM3.07) and AIRPORT (OP; TP: RM6.42) as newcomer Malindo will join the Malaysian LCC industry by May 2013. While  the competition to AIRASIA is imminent, we believe that it will be able to withstand the challenge given its extensive existing routes, aggressive marketing and attractive promotions. However, our pick is on AIRPORT as it stands out to be the clear winner of the healthy competition brought in by Malindo, just in time as well with its KLIA2 opening. On the other hand, we continue to see a mundane outlook for the shipping sector due to the weaker global economy. We see only a short-lived buying opportunity for MISC due to the weak long-run sector fundamentals. On the overall, we like AIRPORT (OP; TP: RM6.42) as it is well positioned to benefit from the increasing passenger traffic from Malindo, AIRASIA and MAS (UP; TP: RM1.06). This is further supported by the company’s long term defensive earnings as well.    

Mixed 9M12 results.  Companies in the sector reported a mixed bag of results with MAS and POS coming in above, AIRASIA below while AIRPORT was within expectations. The yield for the airlines was unchanged despite the softening crude oil prices during 3Q12. However, the airlines still enjoyed higher loads due to the festive season in the quarter. The load numbers are also expected to move higher in 4Q12 sue to seasonality factors. POS’ results came in above our expectations due to the strong rebound in its courier service, which we had underestimated. In 2013 however, it will be a tough year for the airlines as the competition heats up with Malindo’s entry into the Malaysian aviation sector. AIRPORT (OP; TP:RM6.42) will be the clear winner from the intensified competition between the airlines and its upcoming KLIA2 operation will give its earnings a boost going forward from the additional retail and rental income.   

Seasonally weak quarter, 1Q13. Despite softer crude oil prices, we expect the airlines’ earnings to remain unexciting due to the seasonally slower quarter for the airlines (contradict with above para). Meanwhile, we believe that Malindo will start its marketing and promotions during this period for its May 2013 take-off and this may attract AIRASIA’s customers in a knee-jerk reaction. As a result, we expect a price war and competition to start, which could jeopardise AIRASIA’s earnings in the short term. On a longer term view, however, we still believe that AIRASIA will be able to withstand the competition. In any case, AIRPORT will be the clear winner above the likely intense competition between AIRASIA and Malindo as the fight will result in a better airline and passenger traffic. This bodes well its KLIA2 prospect as it will increase the utilisation rate here at a faster pace.   

     

Mixed charter rate trends point to continued volatile near-term outlook for the shipping sector. Charter rates for the different shipping segments were mixed in 4QCY12. The tanker and dry bulk segment rates were up an average of 6.0% and 3.5% respectively, while the LNG vessel spot and term-charter rates dropped by an average of 10.6%. Despite improvement in the tank and dry bulk segments' rates, they are still a far cry from that seen in CY11. We foresee that the situation will likely to continue to be volatile within the ranges seen in 2012 for the next 1½ years as there still remains an oversupply in vessel capacity (estimated to stretch at least until 2014).The fall in charter rates for the LNG segment was lower than that of 3QCY12 (down 14.9%) and was believed to be due to the lower spot cargoes and higher vessel supply. While this is negative in the short run, we believe that in the longer run, LNG segment charter rates will still stay above the US$100k/day mark, sustained by demand from Japan.

Kick-start of Samalaju Port’s funding.  Recently, Bintulu Port (“BIPORT”) announced that it had made a proposal for the placement of new shares of  up to 15% of its issued shares to its major shareholders; and a SUKUK issue as well, although its amount was not disclosed. We are positive on the news as we believe that Biport is about to finalise the terms and conditions of its concession agreement. However, the quantum of the new shares is a surprise to us as we are expecting less than a 15% placement (we expected c.5% to 10%). We are maintaining our MARKET PERFROM call and TP of RM7.18 for BIPORT at this juncture pending further information from the management.

We are maintaining our NEUTRAL recommendation on the sector. We like AIRPORT (OP; TP: RM6.42) for its defensive earnings and its monopolistic position that will benefit from the intense competition between Malindo and AIRASIA. We also see increasing load numbers from MAS with its new aircrafts and its turnaround initiatives. Hence, this will be a good time for AIRPORT to grow both its aeronautical and non-aeronautical income via its Main Terminal Building and the upcoming KLIA2. We have excluded the contribution from Maldives in our forecast and AIRPORT may be required to write off its 23% investment in the AIRPORT-GMR JV (c.RM22m).   

Source: Kenanga