Transport Sector - Doing the Twist Together (OSK)

AirAsia and MAS will unveil more details on their strategic collaboration this month. We see both airlines benefiting in the areas of maintenance, as we gather that at least 55 of AirAsia’s planes will soon need to go through required C and D checks. We see MAS making more capacity cuts, notably on the domestic and ASEAN routes, given the potentially lower demand for full service travel. Firefly has ceased flying to East Malaysia and will likely see Senai’s role as its hub decline as AirAsia takes over. Amid shrinking demand for domestic full service travel, MAS could reallocate its narrow bodied planes to international routes, with a possible partnership with Qantas' OneAsia as the latter is still awaiting delivery of new planes. Should this materialize, MAS would be able to further lower its costs while Malaysia Airports (MAHB) would be able to rake in more revenue. We maintain OVERWEIGHT on the aviation sector.

Maintain OVERWEIGHT. With the near term outlook remaining somewhat bleak for the national carrier in terms of capacity cuts, and the looming threat of a picketing (or in a worst-case scenario, a strike) by MAS’ workers union disrupting operations, we continue to retain our SELL call on MAS, with our fair value unchanged at RM1.15, premised on 1.8x P/NTA. For exposure to aviation, we like AirAsia (BUY, FV: RM5.18), which remains our top sector buy, and MAHB (BUY, RM7.36). With 2 buys in our sector coverage, we retain our OVERWEIGHTcall on aviation.