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, we deem that this year would be an eventful year for the airlines, especially for AIRASIA (OP; TP:RM3.23) and AIRPORT (OP; TP:RM6.12) given that the new kid on the block Malindo has already commenced operations on 22 March 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 in June-2013. On the overall, we like AIRPORT (OP; TP: RM6.12) as it is well positioned to benefit from the increasing passenger traffic from Malindo, AIRASIA and MAS (MP; TP: RM0.77).

Results above expectations. Companies under our coverage reported a strong set of results with AIRASIA, MAS, and POS coming in above, while AIRPORT was within expectations. The yield for the airlines remained unchanged despite the softening crude oil prices during 4Q12. However, the airlines still enjoyed higher loads due to the festive season in the quarter. POS’ results came in above our expectations primarily due to the strong rebound volume seen in its courier service, which we had underestimated. Going forward, it will be a challenging year for the airlines as we see that competition heats up in the air with Malindo’s recent entry into the Malaysian skies. As such, we deem that AIRPORT (OP; TP:RM6.12) 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.

Stiff competition ahead. Despite softer crude oil prices, we expect the airlines’ earnings to remain unexciting in near-term due to intensified competition in the local skies given Malindo entry in the domestic market. To recap, Malindo has already started operations on 22 March 2013 with seven daily flights spread across Malaysia’s two largest domestic routes – Kuala Lumpur to Kota Kinabalu and Kuching. Given Malindo’s hybrid business model, which comprises low fares and better services, we expect a price war and competition to start, which could jeopardise AIRASIA and MAS yield in the short term. On a longer-term view, however, we still believe that AIRASIA will be able to withstand the competition while MAS would be still able to keep up by focusing on its international route. In any case, AIRPORT would be the clear winner above the likely intense competition between the three airlines, AIRASIA, MAS and Malindo as the fight will possibly 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. KLIA2 is slated to start operations in 28-June-2013. Weak 1Q13 results announcement is expected to weigh down airlines share price performance in 2Q13.

Mixed charter rate trends continue in 1QCY13. The tanker and dry bulk segment rates were up 1.6% and 6.3% on average, respectively, but in contrast the LNG vessel spot and term-charter rates dropped by an average of 12.8% (more from previous quarter’s fall of 10.6%). Despite improvement in the tank and dry bulk segments rates are still a far cry from that seen in CY11, and we foresee the dry bulk rate will likely to continue to be, at best, 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 till 2014) and uncertain near-term global outlook.

Private placement details for Samalaju Port’s funding finalized. On 22 Mar, BPORT announced that it had finalised the proposed private placement exercise undertaken for the development of the Samalaju Port (estimated to cost RM2.2b). The exercise for a 15% private placement (60m shares) to the State Financial Secretary Sarawak (SFSS) or a nominated company of the SFSS at an issue price of RM6.65/share; is estimated to raise RM399m and be completed by 2QCY13. As the State Financial Secretary already holds around 30.7% of BIPORT it is also seeking an exemption for SFSS from the obligation to undertake a mandatory offer for the remaining shares. We believe the finalisation of the placement is a clear sign that the Samalaju port development is steadily progressing. Going forward, we believe BIPORT will announce the finer details of: 1) the Samalaju concession agreement and; 2) the Sukuk bond (estimated to be RM1-1.1b) where CIMB is the lead arranger, later. For now, we maintain our Market Perform call and TP of RM7.03.

We maintain our NEUTRAL recommendation on the sector. However, we like AIRPORT (OP; TP: RM6.12) 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.

Source: Kenanga