• Upgrade to OVERWEIGHT from Neutral; Top Picks: Malaysia Airports (MAHB) and TASCO. Of the five companies under our coverage that reported results, three came in line while two fell below estimates. The sector upgrade is underpinned by positive macroeconomic and sectorial indicators, ie emerging signs of recovery in China, a further pick-up in tourism activities, and stronger momentum in trade activities.

• Westports’ 3Q23 core earnings were within our expectations, remaining relatively stable QoQ but reflecting a 30% YoY improvement. This was attributed to a low-base effect, resulting from one-off expenses (Cukai Makmur and legal expenses with Oracle) incurred in 3Q22. 3Q23 container revenue were flattish despite a 7% increase in container volume, due to lower storage charges and VAS contribution.

• MAHB is regaining momentum in both aeronautical and non-aeronautical segments. The stronger YoY performance was not a surprise to us, given the promising growth in both passenger traffic and recovery rates. However, earnings contracted 11% QoQ due to the provision for doubtful debt for MYAirline, higher depreciation, and increased user fee – in tandem with the increase in passenger traffic. Its retail segment revenue has also increased 2.6x YoY, attributed to improved passenger mix, higher retail spending per ticket of MYR304 (vs 2Q23: MYR290), and higher royalties.

• Freight forwarding business hit by a double whammy. The confluence of reduced freight rates and subdued demand continues to erode margins of the freight forwarding business. The sluggish quarterly performance was in tandem with the weak trade date printed, as well as softer global economic and trading activities. For logistics players under RHB’s coverage, FM Global Logistics’ 1QFY24 results were in line but recorded a -21.6% YoY drop, while TASCO’s 2QFY24 earnings were below expectations – both due to softer freight forwarding business volumes and slower-than-expected warehouse activities. Nevertheless, we expect TASCO to record a much better performance in 2HFY24 – from maiden contributions of new warehouses, which should fetch wider margins compared to its current rented warehouse.

• GDEX’s 9M23 results fell short of expectations while 3Q23 marked another quarter of losses. The challenges stem from persistent intense pricing competition in the courier industry, slower-paced online activities, and margin pressure from higher maintenance costs and opex.

• Recovery signs in place. Our sector upgrade is justified, based on the positive macroeconomic and sectorial indicators. RHB Economics expects trade momentum to strengthen beyond 4Q23, supported by the resilience of US and regional economies, global technology cycle rebound, and early signs of recovery in China. Note that US/ASEAN/China constitute c.11%/28%/13% of Malaysia’s total exports.

• Downside risks to our sector call are slower-than-expected recoveries of trade activities and the tourism industry.

Source: RHB Securities Research - 6 Dec 2023