• China’s reopening is a positive catalyst for the sector, driving throughput growth for both seaports and airports in 2H23. Nevertheless, hurdles that remain in its choppy execution would act as a near-term challenge, with the reopening likely to be gradual. Tepid global economic growth, underpinned by geopolitical tensions and persistent supply chain disruptions, may also lead to relatively soft global trade flows for the full year. So, we reiterate our partiality for diversified logistics player TASCO. Still sector NEUTRAL.

• Cautious on near-term travel restrictions. We view positively the pickup in passenger throughput in recent months but choose a more cautious stance on the likelihood of passenger throughput returning to pre-pandemic levels – especially with regards to foreign travellers. With Prime Minister Datuk Seri Anwar Ibrahim having urged the tightening of border controls to maintain cognisance of countries with still-high infection rates, we believe travellers from China are likely to leave a volume shortfall in the local tourism scene, given the resurgences resulting from the country’s hasty reopening. We stay NEUTRAL on Malaysia Airports (MAHB), noting that Chinese travellers historically account for c.12% of total international throughput. That said, we do not rule out the possibility of pent-up demand that may arise as a result of China’s reopening once the current resurgence blows over. Elsewhere, the Malaysian Aviation Commission’s (MAVCOM) keeping airport tariffs status quo may act as a stumbling block to MAHB’s earnings growth, in our view.

• Cautiously optimistic on global economic growth. According to International Monetary Fund, global growth is expected to slow to 2.7% in 2023 (2022: 3.2%), citing the simultaneous slowdown of the three big economies: the US, EU, and China. RHB economists project the 2023 account balance to be at 2.7% of GDP – with a moderation in exports and imports in 1H23. That said, we are cautious on global trade flows for FY23 at this juncture, which could pose as a downside risk to container throughput growth for Westports that historically had transhipment make up the bulk of its throughput revenue, at c.60% of total container volume. We look forward to China’s reopening as a potential re-rating catalyst, but maintain cautiousness of near-term challenges still present in the supply chain.

• Freight rates have normalised to close to pre-pandemic levels. The Drewry World Container Index has dropped by c.80% YoY and industry players believe freight rates are unlikely to pick up again in FY23. Concerns surrounding the impact on earnings as a result of normalising freight rates are not unfounded, so we advocate for investors to look into diversified logistics players such as TASCO (for its 3PL segment), which should enjoy still-robust export and import volumes driven by domestic demand. Note: RHB economists expect local GDP growth to stand at 4.5% in FY23.

• TASCO remains our Top Pick. The sustainable outstanding performance from the past few quarters has highlighted the importance of operational excellence and management’s strategy in defying investor expectations of a contraction in earnings due to the downtrending freight rate that has led to the share price underperformance YTD. The stock’s below-peer valuation of 7x presents a compelling investment proposition into the country’s leading integrated logistics player with consistent earnings delivery.

• Risks to the sector include a worse-than-expected resurgence of COVID- 19 cases in China resulting in a longer-than-expected rolling lockdown.

Source: RHB Research - 10 Jan 2023