Investment Highlights

• We are NEUTRAL on the transportation sector over the next 12 months. The prospects of airlines and airport operators are favourable, backed by tourist arrival growth projected at 8.8% to 28.1mil in 2019 by Tourism Malaysia (Exhibit 1). However, this is offset by cost pressure at AirAsia following the sale and leaseback of its aircraft. For seaport operators, we believe that no news is good news as any realignment of shipping alliances could result in a significant loss (or gain) in container throughput.

• We believe Malaysia’s tourist arrivals are on track to meet Tourism Malaysia’s forecast. While tourist arrivals only grew 4.8% YoY to 11.0mil in 5M2019, we expect the growth to accelerate for the rest of 2019 as Tourism Malaysia starts to roll out promotional efforts for Visit Malaysia Year (VMY) 2020. Also helping to attract foreign tourists are a weak ringgit and the warming Malaysia-China ties. We also take comfort that the proposed departure levy (RM8 for Asean countries and up to RM150 for non-Asean countries, including different rates for different tiers) will now only take effect on 1 September 2019 (vs. 1 June 2019 previously). Also, increases in passenger service charge (PSC) at the airports, coupled with aircraft landing and parking charges for the airlines, if they do happen, will only take effect in 2020 after the implementation of the new Regulated Asset Base (RAB) framework.

• The positive outlook for Malaysia’s tourist arrivals will be a tailwind to AirAsia’s key strategy to aggressively grow its topline to mitigate the higher cost structure arising from its planes that are now largely leased vs. owned previously. The recent weakness in crude oil prices is also positive for AirAsia as it will reduce its fuel bills. The airline’s long-term prospects remain robust backed by its digital transformation and continual cost rationalisation.

• We are generally positive in the outlook of ports in Malaysia. We were pleasantly surprised by the strong numbers reported by the ports in 1Q2019. This alleviates our concerns on the impact of the US-China trade/tech war over Malaysian ports’ activities. Depending on how the US-China trade/tech war pans out, the ports may even benefit from the trade diversion to Malaysia. Meanwhile, the ports are forging ahead with their expansion plans, including Westports’ new liquid bulk jetty and Westports 2’s expansion plans (10 new container terminals, i.e. CT10 to CT19, adding 30 million TEUs handling capacity by 2040) and Pelabuhan Tanjung Pelepas’ (PTP) investment in new Triple-E cranes and development of autonomous driving terminal tractors (a JV with Terberg Tractors Malaysia).

• The rapidly expanding e-commerce sector (projected at a CAGR of 14% in 2018–2022 according to Fitch Solutions, vs. the government’s target of 20%), particularly online shopping, has created huge opportunities for parcel delivery service providers such as Pos Malaysia. However, the sector is weighed down by overcrowding of participants (113 as at May 2019), resulting in cut-throat competition that drives most players into the red. In addition, service quality is an issue, particularly the inability of some players to cope with a sudden surge in volume (during promotional periods by e-commerce operators). We believe the sector is due for a major consolidation. We also believe that players should explore alternative ways to sharpen their competitive edge. Already, GDex has partnered AirAsia’s logistics/tech unit Teleport to tap into AirAsia’s aircraft belly space for express parcel delivery services (Exhibit 4).

• We may upgrade our NEUTRAL stance on the transportation sector to OVERWEIGHT if: (1) volume performance (such as passenger traffic, cargo throughput and mail/ parcel volume) beats expectations; (2) yields surprise in the upside on reduced competition; and (3) fuel cost (jet fuel for airlines and diesel for seaport operators) comes down on weaker crude oil prices.

• We may downgrade our NEUTRAL stance on the transportation sector to UNDERWEIGHT if: (1) volume performance (such as passenger traffic, cargo throughput and mail/ parcel volume) misses expectations; (2) yields surprise in the downside on heightened competition; and (3) fuel cost (jet fuel for airlines and diesel for seaport operators) rises on stronger crude oil prices.

• Our top pick for the sector is Westports (HOLD, FV: RM3.91). The seaport operator has returned to its growth path following the loss of a major customer during a major reshuffling of the global shipping alliances in 2017. A 13% tariff hike effective from 1 March this year will help lift its margins and earnings.

Source: AmInvest Research - 11 Jul 2019