We are maintaining our NEUTRAL recommendation for the Transportation sector as we do not expect any earnings and news surprises in 4Q12. Despite the concern on higher fuel cost in 4Q12, the airlines are well prepared to absorb the hikes this round as at least 15% of their fuel consumptions have been hedged at more attractive prices. We expect that the Aviation sector will benefit from the upcoming Budget 2013 through government's incentives and support in promoting the Malaysian tourism sector. Our top picks for the sector are AirAsia (OP; TP RM: 3.66) and MAHB (OP; TP RM: 6.45) where investors could capitalise on lower entry prices currently coupled with the potential benefits from the upcoming Budget 2013. We are not bullish on the Shipping sector as we believe that its potential strong earnings performance in 4Q12 could have factored into our expectations. That said, the sector will be defensive in the near term as we see its risks to be well capped at this juncture. The sector is also seen as having less 'elections' risk as compared to the other sectors.       

1H12 results within expectations.  All of stocks under our coverage reported 'in-line' results for 1H12. We also noted that the seasonally weak period was well supported by a 10% lower fuel cost. POS Malaysia (POSM) reported a better than expected set of results due to the strong rebound in its new business and other income, which we had underestimated. With strong double-digit growth for the next five years as guided by POSM's management, we see the contributions from its new businesses i.e. Islamic pawn, micro financing and courier online retails will increase significantly for the group, making up a larger share over the down-trending contribution from its conventional post business.

Strong season for airlines in 4Q12. Both airlines under our coverage have hedged c. 15% of their 3Q12 and 4Q12 fuel consumptions at c. USD119/barrel for Jet Kerosene. This will support the airlines earnings during the coming period and we expect their earnings to come in within our expectations as we have assumed that the average fuel cost will hover around USD120 to 130/ barrel for FY12. Budget 2013 should benefit the aviation sector as it s closely related to the tourism sector and we see AirAsia and MAHB to benefit from the efforts to promote the country's tourism. Nonetheless, we have trimmed our Target Price lower for AirAsia to RM3.66 based on a lower implied FY13E PER from 13x to 11x. We think that this is justified as the sentiment on the stock has been affected by the potential competition from Malindo. 

Uninspiring shipping rate trends.  We note that shipping charter rates have been on a downtrend since July-12. Tanker rates have fallen by an average of around 3%, the dry bulk segment rates have dropped by an average of 11.8% and the LNG vessel spot and term-charter rates are down by about an average of 13.7%. Moving ahead, we believe that the recovery in the tanker and dry bulk vessel charter rates will still be volatile and sluggish for at least the next 1'' years as there still remain 1) an oversupply in ship capacity (estimated to stretch at least till 2014) and 2) a weak future global economic outlook.

Samalaju Port in the making'.We understand that Samalaju Port's construction is currently in progression, with full completion expected by mid-2013. The concession entity is in the midst of finalising its financing structure and we have been guided by management that Bintulu Port's earnings and dividend payout will be maintained even if there is a need of new capital injection for Samalaju Port's development. We thus believe that the asset could be developed under a Special Purpose Vehicle (SPV) in collaboration with other investors. Thus far, the construction of Press Metal and Tokuyama plants are at their advance stages with the first production output tentatively by mid-2013. 

We are maintaining our NEUTRAL recommendation. We favour AirAsia as our Top Pick in 4Q12. We see the selldown in AirAsia as a good opportunity to collect the shares at a lower price as we believe that the selldown has been an overreaction on the Malindo issue. Malindo will start its operation in May 2013, but the competition could be minimal as both airlines differentiate themselves with their products. For instance, Malindo offers frills like WIFI and flight entertainment. For a conservative investment portfolio, stance, we feel that MAHB will be a good pick for its stable earnings and KLIA2 potential to break even (operationally) in a short period of time (1 year upon opening in April 2013).

Time to consider airlines. Despite the recent selldown in AirAsia shares, we are of the view that interests in AirAsia will emerge again in 4Q12, supported by a likely stronger 3Q12 earnings and the seasonally strong season. Both the airlines, i.e. MAS and AirAsia have hedged 15% of their 3Q12 and 4Q12 fuel consumptions at the average of USD119/barrel (Jet Kerosene). We believe that their earnings for the remaining 2H12 period will meet our expectations given our assumption on fuel prices of around USD120 to USD130 per barrel. For MAS, we do expect some recovery in the 2H12 supported by higher loads and cost efficiency from its new fleet. However, we do not expect MAS to turn in a profit at this juncture due to the gestation period needed for the new fleet to make a meaningful impact, possibly only by end-FY13. In the shorter term, its fuel surcharge is expected to continue to support its earnings against a flat yield growth. Meanwhile, we have trimmed our Target Price lower for AirAsia to RM3.66 (RM4.06 previously) based on a lower implied FY13E PER from 13x to 11x. We think that this is justified as the sentiment on the stock has been dented by the potential negative impact from Malindo's entry into the Malaysia LCC industry.   

Malindo Airways a threat?  Malindo Airways (Malindo) will offer relatively different product services to consumers with its wifi and in-flight entertainment. We do not discount the possibility that a price war will take place when Malindo starts its operation in May13. However, we reckon that the price war will be minimal due to the limited room to cut ticket prices and that this short-lived strategy will not be sustainable, especially for new entrants. That said, as Malindo will be aggressively ramping up its capacity and routes, a knee-jerk reaction is still expected. AirAsia will likely battle this threat via its ancillary income. In short, we do not see a head-to-head ticket price war but more of a competition on the pricing of the frills and AirAsia's ancillary income. However, we did factor in a lower ancillary income contribution per passenger in our FY12-13E forecasts.    

Uninspiring shipping rate trends. We note that shipping charter rates have been on a downtrend since July-12. Tanker rates have fallen by an average of around 3%, the dry bulk segment rates have dropped by an average of 11.8% and the LNG vessel spot and term-charter rates are down by about an average of 13.7%. Moving ahead, we believe that the recovery in the tanker and dry bulk vessel charter rates will still be volatile and sluggish for at least the next 1'' years as there still remain 1) an oversupply in ship capacity (estimated to stretch at least till 2014) and 2) a weak future global economic outlook. Bunker cost meanwhile, although it has weakened (on the back of softer crude oil prices), continues to be stronger vis-''-vis the shipping industry charter rate trends. LNG vessel charter rates, which could see some hiccups within the year due to the changes in LNG demand and the policies of Japan, but they are likely to stabilise at around US$120-150k per day level as the global LNG demand continues to be strong. 

Keeping MISC at a MARKET PERFORM. We note that the share price of MISC has been on a downtrend since July-12. We believe the retracement was largely due to the 1) weak sentiment in regards to the domestic stock market due to the General Election (GE) uncertainties; and 2) negative news flows in regards to the global economy and shipping trends. Having said that, we believe the retracement could be reversed post the GE when market sentiment improves. As such, whilst there is a 12% upside from current share price (RM4.16) to our target price (RM4.66) we refrain from upgrading our call as we expect the share price of the stock to remain volatile in light of the market uncertainties. Thus, we maintain our MARKET PERFORM call on MISC.

Unchanged view on Bintulu Port at this juncture.  Since our last strategy report, there have been minimal changes in BIPORT, save for the continual dredging of its new Samalaju port, the contract of which has been awarded to TRC Synergy Bhd in June-12. As such, we are maintaining our outlook and call (MP; TP: RM7.02) on the company until the concession agreement for the Samalaju port is finalised. We expect the development will not distort BIPORT's key financial performance and that it will maintain its dividend payout (vs. the previous year) as shareholders' interest are held in high regard by the company. The catalysts for BIPORT's earnings are 1) a higher tariff for cargo handling in Samalaju Industrial Port when it is completed by 2H13 and 2) higher LNG vessel calls and port's services when the ninth LNG train for MLNG is completed by 2016.

Source: Kenanga