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.
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