We are maintaining our NEUTRAL recommendation on the transport & logistic sector in 4Q13 due to: (i) the volatile near-term global outlook in the shipping industry (tanker and dry bulk segment) on vessels oversupply, and (ii) the yield pressure on airlines in the aviation sector. Nevertheless, some excitement lies within the aviation industry as the LCCs in the Southeast Asia region are expecting to receive 85 more aircrafts by year-end, which will intensify competition. Fortunately, a seasonally stronger 4Q13 would help absorb incoming new capacity and boost airlines’ earnings. Hence, we continue to favor AirAsia Bhd (AIRASIA) as our 4Q13 Top Pick over AIRPORT as we see buying opportunity in AIRASIA as it is currently trading at 8.3x FY14 PER, a 34% discount to its peers. However, Malaysia Airport Bhd (AIRPORT) is well positioned to benefit from the increasing passenger traffic as competition between airlines benefits travelers.

2QCY13 results review. For the recent 2QCY13 results, four out of six companies under our transport & logistic sector namely AirAsia Bhd (OP, TP: RM3.51), Bintulu Port Holdings (BIPORT, UP, TP: RM7.05), MISC Bhd (MISC, UP, TP: RM5.06) and Pos Malaysia (POS, MP, TP: RM5.39) performed well within our expectations while the remaining two reported a mixed bag of results. AIRPORT (MP, TP:RM7.72) registered better-than-expected result, beating our previous estimates by 11% due to stronger-than-expected passenger traffic growth and a higher contribution from its construction segment. While Malaysian Airline Systems’ (MAS, MP, TP: RM0.35) results were way below our expectations as our yield assumptions were overly aggressive previously coupled with a seasonally weaker quarter for the aviation sector.

Impact from GST? Unlikely to have any material impact to the players given that airlines and shipping should be classified as international services, which fall under the zero rated supplies' category under GST. Aviation sector in 2H13 Despite a seasonally slow 1H13, the aviation sector enjoyed healthy passenger volume growth as a result of heavy discounting on airfares by the airlines. Moving into 2H13, we are positive with the sector as we believe that the yield for airlines would gradually improve in 4Q13 underpinned by robust air travel demand due to the coming festive and holiday seasons. In the 8M13, AIRPORT continues to register fantastic double-digit growth of 15.5%, YoY, signalling healthy air travel demand both in the domestic and international space. Hence, we are confident that the airlines would be able to surprise the market with a good set of earnings in 2H13.

Westport’s (WHB) IPO is the main attraction in the port sector for now; BIPORT remains an UNDERPERFORM due to its lofty valuations. WHB will be listed on 18th October 2013 at a listing price of RM2.50/share with an estimated market capitalization of RM8.5b. Being partly owned by Li Ka Shing, WHB has attracted much interest from the market and it is set to be one of the largest IPO this year. We foresee more value in WHB given that: (i) it is one of the most efficiently operated port around the world; (ii) there are more capacity expansions planned in the coming years to cater for container traffic growth; and (iii) its strategic location in Port Klang, one of the busiest container ports around the world. However, for BIPORT, we reckon that its valuation appears to be overstretched at CY14 P/E of 22.4x for now. This is at a premium to the valuation to the WHB’s CY14 P/E of 21x and NCB’s 15.6x, hence, we maintain our UNDERPERFORM rating on this stock.

Uncertainties remain in the shipping market, cautious on MISC’s outlook. In the shipping space, dry bulk segment strengthened with average rates rising 58.1% in 3QCY13 but the LNG and tanker rates have only improved marginally. This is in contrast with the rate decreases in 2QCY13. Despite the short-term improvement, we still expect the shipping market to remain volatile as more newbuilds continue to enter the market and bump up the supply. Demand will struggle to catch up with new supply, putting pressure on charter rates, especially in the dry bulk segment. Given the uncertainty surrounding the shipping segment, we continue to remain cautious in this segment. Hence, we are cautious on MISC’s (UP; TP:RM5.06), as not only will the overall shipping environment have some bearing, it now also faces having to bid for foreign LNG charter contracts given that Petronas is sourcing LNG vessels on its own. We maintain our UNDERPERFORM rating on this stock.

Source: Kenanga