• Top Picks: Malaysia Airports and TASCO. 2Q23 sector results were mostly in line, except for GDEX whose numbers were worse than expected. Despite the prolonged weakness in trade flows and soft Malaysia trade data for 2Q23, FM Global Logistics (FM), Westports, and TASCO chalked in-line earnings. We remain NEUTRAL on the sector.

• Westports’ 2Q23 results met expectations due to the 8% YoY growth in its container throughput, which exceeded management’s low single-digit guidance. This was partially supported by higher-than-expected empties (29% of total TEUs). Despite China’s recent disappointing economic data, management thinks that the repositioning of empties could indicate early signs of revival in China’s manufacturing activities. With most of the empties already being channelled back to China, we gathered that 2H23 container volume should point to a lower ratio of empties, and the YoY growth would be flattish due to the high base. We still expect container volume throughput to grow by single digits YoY in 2023.

• Brighter skies for aviation. Malaysia Airports’ 2Q23 earnings (+29.7% QoQ, +>100%YoY) were supported by robust passenger traffic and the further resumption of airline services for the quarter. Its 1H23 earnings were only at 38% and 42% of ours and Street’s full-year projections but we expect its revenue and earnings to catch up in 2H, in tandem with the peak travelling season (especially in Turkiye) and pick-up in the number of inbound tourists from China to support Malaysia’s operation. Meanwhile, Malaysian Aviation Commission’s Third Consultation Paper and MAHB’s new operating agreement with Government could be finalised in 2H23.

• Logistics service providers booked results that met estimates despite sector headwinds. FM’s FY23 (Jun) results were in line despite the prolonged weakness in all segments. Meanwhile, TASCO’s 1QFY24 (Mar) earnings were only at 15% and 16% of ours and Street’s full-year forecasts, but we regard its performance as in line (1QFY24 was a seasonally weaker quarter). The slower-than-expected shipment volume growth from the lack of activities was underpinned by Malaysia’s weak trade data for 2Q23. We expect freight forwarding businesses to still see headwinds, as capacity (air cargo belly and ocean vessels) continues to grow while demand remains subdued. On a brighter note, FM and TASCO’s third-party logistics (3PL) businesses, ie warehousing, should continue to cushion group earnings, mitigating the downside from the international business unit.

• Last-mile earnings heading south. GDEX’s 2Q23 results missed expectations, as its after-tax loss more than doubled QoQ and YoY to MYR11.9m. We maintain that challenges within the last-mile delivery space may persist, with margins to remain under pressure due to the ongoing price war, while demand softens as a result of physical retail businesses resuming operations.

• Upside/downside risks to our sector call are a faster-/slower-than-expected recovery in trade activities and faster-/slower-than-expected recovery in the tourism industry.

Source: RHB Securities Research - 5 Sept 2023