The transport sector chalked up an average total return of 14.8% vs the FBM KLCI’s 0.6% return YTD. Shipping generated the highest return, but ports were laggards. That said, shipping and ports’ 1Q’s earnings are likely to disappoint while aviation could surprise in view of strong passenger numbers. Maintain NEUTRAL on Transportation sector, with OVERWEIGHTS on Aviation and Logistics.

OVERWEIGHT aviation. Travel demand remains favourable even as newcomer Malindo is adding to overall traffic growth, which is positive for airport operator Malaysia Airports Holdings (MAHB). Although this could pressure the load factor and yields of airlines under our coverage, we think the impact will be fairly contained due to Malindo’s small fleet and its inability to offer airfares at steep discounts in the longer run. AirAsia is our top sector pick. We deem it too premature to be alarmed by recent cases of bird flu given that there are still no signs of human-to-human transmission.

NEUTRAL on shipping. The demand-supply disparity for vessels continues to persist but is improving. We believe shipping rates have bottomed and are now on a stable but slow recovery. This has prompted dry bulk players to buy cheap vessels ahead for the next upcycle. We like Malaysian Bulk Carriers (Maybulk) from a valuation standpoint given its net cash balance, and see the potential listing of its marine offshore associate PACC Offshore Services Holdings Pte Ltd (POSH) crystallizing valuations. That said, macro risks still prevail. On expectation of 1QFY13 earnings disappointing, we remain NEUTRAL on the SHIPPING sector.

OVERWEIGHT logistics; NEUTRAL on ports. We expect integrated logistics players such as Tasco and Freight Management to benefit from strengthening trade growth while NCB Holdings stands to gain from improved container throughput. Our top pick is Pos Malaysia, whose thriving e-commerce activities are fuelling profits at its courier division, while its direct mail venture will mitigate the natural decline in conventional mail volume.

Source: RHB