Transportation Sector – 1H24 Flash Back

It was a significant milestone in 1H24 as both Malaysia Airports Holdings (MAHB) and Westports Holding (Westports) finally obtained the long-awaited new concessions, which extended the duration to 2069 and 2082 respectively. Also, Capital A announced the regularisation plan during this period, hoping to uplift the company from the PN17 status.

However, 1H24 was also full of surprises for the transportation sector. First, the red sea crisis saw Houthis attacking cargo vessels, forcing global shipping liners re-routing their vessels via the Cape of Good Hope, causing shipment delays and spikes in ocean freight rates. This was further compounded by the war between Israel and Iran later in April. When we started seeing the freight rates tapering, there was another shock from the US, which imposed stiff tariff on Chinese goods that resulted in the freight rates to surpass the previous high level. On the flip side, the team-up of Khazanah, EPF and Global Infrastructure Partner (GIP) in privatizing MAHB, pending satisfaction of pre-conditions, has sprung positive surprises to minority shareholders as the offer price is fixed at a record high level of RM11.00/share.

In the recent 1Q24 results reporting season, the transportation sector revenue surged 70.6% to RM7.4bn, boosted by all companies, excepts CJ Logistics and Perak Transit. In terms of PBT, all companies were profitable after Capital A registered its second quarterly profit in a row, leading to 92% growth in PBT. The common attributes of 1Q24 results performance include: 1) sustained recovery in travel demand; 2) cost escalation in terms of wages, utilities and fuel; 3) interest rate hike globally and tariff concerns in the EU and US have affected global trades.

In terms of share price performance, MAHB (+21%), Westports (+14%) and Capital A (+2%) recorded gains while Perak Transit (-7%) and CJ Century (-12%) suffered from declines (Figure 1). However, only MAHB and Westports outperformed the FBMKLCI (Figure 2), which increased by 9.3% in 1H24.

2H24 Sector Preview

Looking forward, we expect external factors to dominate sector earnings and influence the share price performance in 2H24.

1. US-China trade war to intensify further;

2. Aviation to rely on inbound tourism; and

3. Follow-up announcements/actions.

1. US-China Trade War to Intensify Further

Based on IMF forecasts, the world economy is expected to grow at 3.2% in 2024 and 2025 (attachment 1). Meanwhile, US economy is expected to remain sluggish with a GDP growth of merely 2.7% in 2024 and moderating to 1.9% in 2025. Likewise, China’s GDP growth is expected to slow down to 4.6% in 2024 and 4.1% in 2025 (vs 5.2% in 2023). Underpinning all these, global trade is expected to remain lacklustre this year and next.

The intensifying trade war between US-China is expected to crimp the economic growth further, disrupting the global supply chain as well as dedollarisation. Note that US Trade Representative has unveiled the details of the proposed tariff increases on imports from China, which include solar power products, EVs, batteries, critical minerals, semiconductors, ship-to-shore gantry cranes, steel and aluminium products, and certain medical supplies. Some of the tariff increases would begin on Aug 1. From our channel checks, the proposed tariff increase has brought about major disruptions to maritime activities as Chinese manufacturers and US buyers have booked all available vessel space for immediate shipments to avoid the tariff hikes. This has already led to recent sharp increase in global container freight rates (Figure 4) even before China announcing its tit-for-tat moves. As such, we are keeping a close eye on China now especially before the US presidential election is over.

In our opinion, the trade war between US and China is not necessarily bad for emerging countries as it would hasten the adoption of China + 1 strategy. From FDI point of view, Malaysia is clearly one of the main beneficiaries with total approved investments of RM329.5bn last year, the highest in history. As such, we see silver linings for the Malaysian transportation sector in the light of global supply chain disruptions. We believe Westports would stand to benefit as the increasing approved investments, which would lead to higher outputs, would bode well for the company as a main gateway of exports and imports in Malaysia. Malaysia to benefit from FDI inflow

2. Aviation to Rely on Inbound Tourism

At USDMYR4.70, travelling overseas for holiday may not be so fun anymore as far as our purchasing power is concerned. Importantly, the “revenge travel” post Covid-reopening would likely normalise as the urge to travel would have been satisfied by numerous trips two months ago. A quick random check among colleagues revealed that all of them have travelled more than 3 times since reopening in Apr-22.

In addition, the rationalisation of government subsidy on fuel is expected to have an adverse impact on Malaysians travelling abroad. The subsidy removal would likely add to the burden of consumers, which we think one of the belt-tightening ways is to cut back on travel budget.

Having said that, we expect the inbound tourism to remain robust on the back of the weak ringgit, relaxation of visa requirement and increase in flight capacity. According to Capital A, the company is expected to increase its operational aircraft to 204 by 4Q24 from 167 in 1Q24. In addition, given our in-house USDMYR forecast of 4.65, tourism activity would likely remain flourishing in 2024. In our forecast, we expect MAHB’s passenger movements to surpass the pre-pandemic level (105.3mn) to reach 118mn this year before inching higher to 121.5mn next year.

3. Follow-up Announcements/actions

We look forward to 3 major announcements that would steal the limelight in 2H24. Firstly, it is crucial for interested parties (Khazanah, EPF and GIP) to fulfil the pre-conditions before making a valid general offer to privatise MAHB for RM11/share. Hence, we look forward to announcements pertaining to satisfactions of these pre-conditions, including:

1. The Receipt of a Non-infringement Decision From MAVCOM;

2. The Receipt of a Non-infringement Decision From the Turkish Competition Authority;

3. Merger Control Approval From the General Authority for Competition Saudi Arabia;

4. Merger Control Approval From the Egyptian Competition Authority;

5. Application to the SC to seeks its consent for the Offer to be announced subject to the pre-conditions.

Secondly, Westports is expected to seek external funding to finance the expansion plan. Pursuant to the new concession agreement and the proposed expansion, Westports will incur an initial development capital expenditure of RM12.6bn for the Proposed Expansion. CT10 to CT13 is expected to cost RM6.28bn, which will be spent from 2024 until 2038, while CT14 to CT17 is another development expenditure of RM6.28bn. Specifically, the capex of estimated RM6.28bn for CT10-13 (phase 1) will be financed through RM5.0bn perpetual Sukuk and RM800mn-1.2bn equity financing via dividend reinvestment plan or placement of share to strategic investors. The construction of terminal would like begin in 2025 after completion of land reclamation in 2024-25.

Lastly, in Capital A’s regularisation plan, there will be a series of corporate development to be carried out before the company is free from its PN17 status. This would include AirAsia X (AAX) obtaining its shareholders’ approvals for exchanging their AAX shares with AirAsia Group (AAG) shares based on 1:1 with free warrant based on 1:2 for the later to takeover AAX’s listing status. Then, Capital A would have to obtain shareholders’ approval on proposed disposals of AirAsia Aviation Group and AirAsia Berhad for total considerations of RM6.8bn to be satisfied by 2.3bn consideration shares in AAG at RM1.30/share plus assumption of 3.8bn debt owing to AAB. This will be followed by distribution of dividend-in-specie where Capital A’s each shareholder would get 397 AAG shares for every 1,000 shares, assuming no conversion of warrants and RCUIDS.

Forecast

No Change to Our Sector Earnings.

Recommendation

We maintain our Neutral stance on the transportation sector given a mixed bag of opportunities and threats in 2H2. Top pick is Westports, after revising the target price to RM4.72/share (from RM4.26 previously), as the company has defensive earnings quality that is less prone to recessionary and inflationary pressures. In addition, the privatisation of MAHB, if materialised, would free up more than RM7bn cash, which can be reinvested into another concessionaire, i.e. Westports.

Source: TA Research - 2 Jul 2024