• NEUTRAL; Top Pick: TASCO. Our investment thesis is unchanged, as we still prefer service providers in the logistics and transportation industries – third-party logistics (3PL) players with diversified businesses that are able to sustain their earnings and offer a buffer against the unfavourable environment that freight companies have to weather. We also upgraded Malaysia Airports (MAHB), as the worst should be over for the aviation sector, with signs of promising recovery and various initiatives in place.

• Infrastructure providers within our coverage are expected to see mixed movements. The shift in post-pandemic global consumption trends, which now favour services over goods, may bring about the risk of weakening throughput volumes for Westports. Throughput volume growth in Malaysia’s major ports (Port Klang & Port Tanjung Pelepas) softened slightly in FY22 (Fig 8) by -0.1% and -0.6%, likely due to the easing of congestion at the country’s ports. We expect trade flows to only see a more prominent impact from China’s reopening in 2H23, as the country is Malaysia’s largest trade partner and a key contributor to global port growth.

• MAHB upgraded to BUY from Neutral, as we think the market has yet to reflect the full potential and upside from this “tourist giant”, which should be an essential catalyst for the tourism industry. Note: China had the second- highest number of inbound tourists to Malaysia in 2019. We see encouraging initiatives by the Government and MAHB to increase Malaysia’s visibility as a travel destination to meet the target of 5m tourist arrivals from China in 2023. We look forward to a few key events in mid- 2Q23, such as the finalised gazetted Passenger Service Charges (PSC) and loss capitalisation mechanism (LCM) in the Third Consultation Paper, as well as the new operating agreement (OA) with the Government.

• Cherry-picking amidst sector headwinds. We continue to advocate investors to choose well-strategised service providers within the sector. We like TASCO for its strong global presence, which allows the group to expand into the fourth-party logistics (4PL) business, handling the entire supply chain management for its key client. Leveraging on its parent’s proprietary software solution and network, it aspires to further grow its supply chain solutions business (currently 2% of group revenue) and maintain client stickiness. In view of freight rate normalisation, earnings would be cushioned by its ability to lock in ocean freight rates with its customers and to negotiate with shipping lines for better margins and volume certainty. This would also help provide earnings visibility, compared to the elevated freight rate era, where it was mostly short-term arrangements. Its well-diversified business model with strengths in the contract logistics (CL) and cold chain segments, coupled with the Integrated Logistics Solutions (ILS) tax incentive should sustain its overall profitability.

• Risks: i) Resurgence of COVID-19 variants leading to lockdowns, ii) slowdown in global economic growth, dampening trade flows, iii) slower- than-expected recovery in passenger and trade volumes, iv) further weakening of freight rates.

Source: RHB Research - 27 Apr 2023