We are maintaining our Neutral rating on the Transportation sector with AirAsia (OUTPERFORM TP: RM4.06) as our top pick for the sector. Despite softening oil prices (crude oil prices hovering at USD96/barrel), we expect the 3Q to be typically a stronger season for airlines due to the festive and school holiday seasons. We expect airlines earnings to be muted despite of softening crude oil price at the level of USD95 to USD96/barrel. For a more defensive stock selection, we prefer MAHB (OUTPERFORM, TP: RM6.50) as it is the beneficiary of growing airlines passenger traffic and its stronger retail income. We also like Bintulu Port (MARKET PERFORM, TP: RM7.20) as a defensive play for its decent dividend (5% to 6% yield) supported by its stable recurring income from LNG vessel's handling. For the shipping sector, we are still negative for 2012 as we believe that the recent hikes in charter rates are not sustainable for the rest of the year. The shipping sector outlook is still challenging with oversupply issues lingering and against a weak global economic backdrop especially in Europe. However, we expect MISC's FY13 earnings to improve after the disposal of its loss-making asset i.e. its liner business. We have recently upgraded our recommendation on MISC from an UNDERPERFORM to an OUTPERFORM with a TP of RM4.44.  We expect some notable news headlines for the sector during the 3Q period like (1) MAS unveiling its new business plan, (2) updates on the listing of Indonesia AirAsia and (3) potential earnings upside from softening crude oil  prices. The key risks to our recommendations are (1) a spike-up in jet fuel price above USD130/barrel, (2) worst-than-expected impact from Suvarnabhumi airport maintenance works and (3) further delays in TAA and IAA listing.  

1Q12 results within expectations except for MAS. Thus far on average, the companies under our coverage reported within-expectations earnings in 1Q12 except for MAS. MAS had reported worse than expected losses due to their high fixed cost structure i.e. in staff costs. Nonetheless, there was a slight improvement seen in MAS' cost structure from its route rationalisation initiative, where its fuel cost was lowered by 1.5% on the back of 9% increase in crude oil price, YoY. As the results of the route rationalisation, MAS' capacity (ASK) dropped by 8% YoY. Going forward, the recovery pace for MAS is likely to remain lackluster in 2012 and we expect it to stay in the red for FY12. 

Weak potential 2Q12 results may dampen 3Q12 peak sentiments.  3Qs are typically strong periods for airlines due to the festive season and school holidays. We also expect airlines to fetch favorable loads and better yields due to the softening crude oil prices at around USD96/barrel currently. However, the positive sentiment will likely be affected by the release of an expected weak 2Q12 results in August 2012. We opine that investors should take the opportunity to accumulate shares then via a buy-on-weakness strategy. The ongoing maintenance works in Suvarnabhumi International Airport, Thailand, is seen as aggravating the airlines' seasonally weak 2Q12 earnings.  

Shipping still yet to recover.  The recovery period for the shipping sector is expected to take at least another nine to 12 months due to the  oversupply issue and the weak global economic outlook. There could be volatility in charter rates in the interim (as there are months of restocking). However the oversupply in global ship capacity and the weak global economic backdrop will likely keep rates at an overall suppressed level. 

Bintulu Port maintains FY12 dividend payout.  We believe that the financing of the Samalaju Port will not shake its current financial position and hence its dividend payout is likely to remain the same as the previous financial years at c. 37.5sen (5% to 6% yield).  We are maintaining our NEUTRAL recommendation. Among others, we favour AirAsia as our Top Pick in 3Q12 while opting for Bintulu Port and MAHB as the defensive picks.

Source: Kenanga