• Downgrade to NEUTRAL from Overweight; Top Pick: TASCO. Out of four companies under our coverage that reported results, Malaysia Airports (MAHB) exceeded expectations, Westports was in line and logistics players ie TASCO and FM Global (FM) missed expectations. Our sector recommendation is now downgraded to reflect the current calls of the sector heavyweights, ie MAHB and Westports.

• A good quarter for the national airport operator. MAHB’s 1H24 performance surpassed ours, but missed Street’s estimations, mainly due to lower-than-expected tax expenses. 1H24 core profit rose 74% YoY, aligning with the ongoing traffic recovery which sees a higher international passenger mix, resulting in higher passenger service charge and retail spending.

• In-line results by the marine port player. Westports’ 2Q24 core net profit rose 4.6% YoY, bringing 1H24 earnings to MYR408m (+7.9% YoY), which met our expectations. Although volume rose 0.7% YoY, 2Q container revenue grew 6.6% YoY due to higher value-added services contributions and increased storage units. The group managed a total of 2.73m TEUs (+1% YoY) in 2Q24, with transhipment and a gateway volume split of 56% and 44%.

• Small-cap logistics players missed expectations despite elevated freight rates, mainly due to lag of repricing. TASCO’s 1QFY25 (Mar) core net profit of MYR10.6m (-25% YoY) was at 15% of our full-year estimates. The weaker earnings were mainly due to weaker contract logistics and air freight forwarding segments on top of unfavourable FX movements. Meanwhile, FM’s 4QFY24 core earnings fell 6% YoY, bringing the FY24 figure to MYR32.6m (-18% YoY), at 94% of our FY24 estimate mainly due to lowerthan-expected sea freight segment.

• Outlook. Malaysia's air passenger movements reached 90% of pre-COVID- 19 levels in 2Q24, while Turkiye has exceeded pre-pandemic levels by 19%. We believe Malaysia's tourism is on track for full recovery, aligned with our FY24 passenger forecast of 105.9m compared to 105.2m in 2019. However, MAHB's privatisation deal is likely to proceed, with only the Malaysian Aviation Commission’s approval remaining. Meanwhile, Westports' yard utilisation is not expected to reach the optimal 65-70% soon, resulting in increased storage revenue at the cost of transhipment. For the logistics segment, global logistics provider DHL expects ocean freight capacity shortage to persist at least until Golden week while the air cargo industry expects a strong peak season due to holiday demand, with capacity pressure and higher rates anticipated. We are more optimistic on TASCO’s prospects for the year ahead on the back of improved freight forwarding segment, volume recovery, contributions from new warehouses, and available tax credits from the integrated logistics services (ILS) incentive.

• NEUTRAL from Overweight, in tandem with our recent downgrade on the calls of the sector heavyweights, ie Westports and MAHB. We think the infrastructure players under our coverage are now fairly valued, as Westports’ share price has risen c.32% to its peak (from start-2024), while MAHB’s share price crept up to reduce the gap with the privatisation offer price of MYR11 – resulting in limited upside potential currently. Within the logistics sector, we stay positive on TASCO (our Top Pick) due to its prospects for the year and ahead, mainly its diversified client base and business segments that will sustain its earnings base, and the ILS tax incentives.

Source: RHB Securities Research - 10 Sept 2024