• Top Pick: TASCO. Despite the robust domestic trade performance and air passenger recovery, we believe sector heavyweights Westports and Malaysia Airports (MAHB) are now fairly valued. Therefore, we prefer logistics players amidst the elevated freight rates owing to route disruptions across the globe. We remain NEUTRAL on the sector.

• Ocean freight industry. Global shipping company Maersk notes that despite high net deliveries and decreasing orderbooks in the industry, low recycling and idling rates indicate that shipping capacity remains fully utilised on most trade routes. CH Robinson, a global logistics firm, anticipates the congestion in the Singapore port to persist, likely until the Lunar New Year. The congestion has also resulted in shipping lines starting to use alternative ports nearby. While the rates are being fully passed on to customers – resulting in a neutral impact on freight forwarders – any significant increase in demand or tightening supply could create opportunities for more favourable pricing for forwarders.

• Air freight industry. Global air traffic remains robust, rising 13% YoY in July, mainly boosted by the e-commerce boom, a shift from ocean to air freight due to the ongoing Middle East conflicts, and increasing general cargo needs for high-tech semiconductors. Political unrest in the Middle East and Ukraine is expected to disrupt trade routes and increase air cargo rates through the end of 2024. Geopolitical factors such as US protectionism may also lead to a surge in imports as businesses rush to bring in goods ahead of possible new tariffs kicking in, thereby impacting the air cargo market and rates.

• Outlook. Total air passenger movements going through airports in Malaysia amounted to 69.7m YTD-Sep 2024, at 66% of our FY24F (slightly behind our estimates). However, MAHB's privatisation deal is likely to proceed, as it is only awaiting the Malaysian Aviation Commission’s approval. 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 the ocean freight capacity shortage to persist – at least until the Golden Week – while the air cargo industry expects a strong peak season due to holiday demand, with capacity pressure and higher rates anticipated.

• Still NEUTRAL. We believe the sector heavyweights under our coverage (infrastructure players) are currently fairly valued, as Westports’ share price has risen c.32% to its peak (from early 2024), while MAHB’s share price has crept up, reducing the gap with the privatisation offer price of MYR11 per share, resulting in limited upside potential currently. Within the logistics sector, we are more optimistic on TASCO, which is our Top Pick due to its prospects for the year ahead, on the back of an improved freight forwarding segment, volume recovery, contributions from new warehouses, and available tax credits from the integrated logistics services (ILS) incentive.

• Downside risks to our sector outlook include a continued slowdown in global economic growth which will paralyse trade flows, and a further weakening of freight rates.

Source: RHB Securities Research - 18 Oct 2024