We are keeping our NEUTRAL recommendation on the transport & logistic sector in 3Q13 over the uncertain near-term global outlook in the shipping industry, where the prospect remains volatile in the tanker and dry bulk segment given the oversupply in vessel capacity, and the continuing yield pressure in the aviation industry on airlines. The aviation industry should see more excitement as airlines like AirAsia and Malindo are expected to take more  delivery of aircrafts in the upcoming months, which will see higher capacities as well as competitions in the sector. However, the weakening of jet fuel prices could, however, be a boon to airlines’ earnings. Hence for our 3Q13 strategy, we selectively chose AIRASIA as our Top Pick over AIRPORT as we see buying opportunities in the stock as its foreign shareholding level has dropped to 51.9% from a high of 53.2% in January. However, AIRPORT is still well positioned to benefit from the increasing passenger traffic from Malindo, AirAsia and MAS.

1QCY13 results round-up.  Four out of the six stocks under our transport & logistic sector coverage namely  AirAsia Berhad (“AIRASIA”, OP, TP: RM3.51), Bintulu Port Holdings Berhad (“BIPORT”, MP, TP: RM7.05), Malaysia Airports Holdings (“AIRPORT”, OP, TP: RM6.60) and MISC Berhad (“MISC”, UP, TP: RM5.06)  reported results that were within expectations while the remaining two were below expectations. Meanwhile,  Pos Malaysia’s (“POS”, OP, TP: RM4.90) results came in slightly above our expectations due to the better-thanexpected performance from its mall and retails segment. Malaysian Airline System’s (“MAS”, UP, TP: RM0.29) loss worse than expected and was attributed to a seasonally weaker quarter and lower than expected yields from rising competition within the aviation sector, especially from the increased capacity from the low-cost carriers (LCCs) namely AirAsia Berhad (“AIRASIA”, OP, TP: RM3.51) and Malindo Airways (Not Listed). 

LCCs to benefit from lower jet fuel price. As jet fuel has been on a downtrend from a high of USD135/bbl to USD115/bbl since the beginning of 2Q13, we believe that the lower price will favour the LCC players like AIRASIA as opposed to FSC players like MAS as jet fuel generally makes up a larger component of the LCCs’ operational cost as compared to the FSCs (around 60% for LCCs and 40% the FSCs, excluding depreciation cost). Hence, we would see a better operating margin improvement for AIRASIA as compared to MAS. Even if the airlines leverage on the lower jet fuel price to price their yield lower to get a better load factor, LCCs like AIRASIA will still be the winner in the skies as they have more advantage in terms of pricing strategy as jet-fuel continues to trend downwards. 

Shipping charter rates continue to be volatile. According to Fearnley’s research, the tanker, dry bulk and LNG segment charter rates were on an overall downtrend in 2QCY13 with the LNG segment recording the lowest drop of 12.3% even after the significant average 10.6% drop recorded 1QCY13. The tanker and dry bulk segments saw milder drops of 2.3% and 1.2% respectively, which were in contrast to the average charter rate increases of 1.6% and 6.3% respectively in 1QCY13. The continued volatility in the tanker and dry bulk segment is not surprising given the oversupply in such vessels capacity and the uncertain near term global outlook. However, given the expanding LNG vessel newbuilding and potential delays in LNG projects, especially from Australia, we believe that there could be a continued moderation of charter rates going ahead. We believe the only saving grace for shipping companies could be the moderating bunker costs which follows the trend of crude oil. However, we suspect it might not make a significant difference in the near-term given it is expected to be flattish moving forward. 

NEUTRAL recommendation maintained. We continue to keep our NEUTRAL call on the sector due to the uncertain near-term global outlook in the shipping industry and further possible yield pressure on the airline players. AIRASIA is our Top Pick for 3Q13 over AIRPORT as its foreign shareholding level has tapered off to 51.9% from a  high of 53.2% in January. Furthermore, the downtrend in jet fuel prices would be advantageous for the LCCs as it would give a boost to their operating margins. Out of the six stocks under our sector coverage, we are downgrading two stocks, namely AIRPORT and MISC to MARKET PERFORM and UNDERPERFORM ratings respectively (from OUTPERFORM ratings previously) due to the limited upside of their current share price to their fair value.

Source: Kenanga