Sectors facing tailwinds | The Edge Markets

As investors bid goodbye to 2022, a year when equity prices lost ground as interest rates headed higher, we now take a look at the industry sectors that are likely to perform on favourable tailwinds and those that are facing challenges in 2023

O&G: A golden year ahead with more jobs, better rates

The continued pick-up in activities in the local upstream oil and gas (O&G) sector pointed towards more jobs and potentially better rates across segments from drilling to offshore fabrication, offshore support vessels (OSV) charters, and for those involved in maintenance, construction and modification (MCM) works as well.

“We believe 2023 will be a golden year for the oil and gas service providers (OGSE) — a laggard to the elevated oil price environment for the past year,” HLIB Research said in a Dec 20 report, following higher activities guided in the recent Petronas Activity Outlook (PAO) 2023-2025.

Analysts highlighted that the upside in activities will benefit rig operator Velesto Energy Bhd, hydraulic workover unit operator Uzma Bhd, MCM player Dayang Enterprise Holdings Bhd, as well as OSV operators Perdana Petroleum Bhd and Icon Offshore Bhd — both of which have undertaken steps to clean up their previously overgeared balance sheet.

Meanwhile, CGS-CIMB Research pointed out that the focus next year will be on floating production storage offloading (FPSO) players which are largely overseas, with companies like Yinson Holdings Bhd and Bumi Armada Bhd benefiting from potentially higher capex spending by oil majors, and a healthy job pipeline.

In the downstream segment, analysts are of the view that the petrochemicals supercycle has ended as product spreads have come off their respective peaks, which is negative to Malaysia’s leading petrochemicals player Petronas Chemicals Group Bhd. However, Kenanga Research said it still enjoys “favourable feed-cost structure” with its parent Petronas, while peers “may be hampered by volatile input costs”.

Analysts are also largely expecting oil prices to remain elevated, albeit with downside risks stemming from recession and demand fears, and the uncertainty surrounding the Russia-Ukraine conflict. At current price levels, a clear beneficiary would be O&G field operators, while local gas station operators like Petronas Dagangan Bhd could see short-term headwinds in the form of potentially delayed payments from the government for petrol subsidies.

Aviation Sector: Signs of a turnaround emerge as demand reaches pre-pandemic levels by 2023

The aviation sector had three tumultuous years as the Covid-19 pandemic caused a major disruption in air travel.

However, signs of a turnaround are emerging, with projections indicating that by 2023, the aviation sector will be earnings positive as demand for air travel is expected to reach near pre-pandemic levels.

The Malaysian Aviation Commission (Mavcom) reported that passenger traffic in the third quarter of 2022 reached 15.6 million — the highest point since the pandemic began — due to the reopening of Malaysia’s international borders in April 2022.

In line with global passenger traffic recovery, the Commission anticipates that air passenger traffic in 2023 will grow between 40% and 52% year-on-year, translating into between 74.6 million and 80.8 million passengers compared with the pre-pandemic number of 109.3 million passengers.

Growth for 2023 will be driven by the gradual restoration of key markets beginning 4Q22, with local carriers, namely Malaysia Airlines, AirAsia, AirAsia X and Batik Air, having made plans to restore capacity and increase frequency, in relation to popular destinations such as Hong Kong, Japan, Taiwan, Australia and the Middle East. China recently scrapped its quarantine rule for inbound travellers, essentially ending the Zero-Covid policy.

Analysts said the lower price of jet fuel is generally positive for the sector as jet fuel costs account for 30% to 50% of airlines’ operating cost structure.

Furthermore, they believe a (projected) weakening of the US dollar (USD) against other regional currencies, including the ringgit, would provide a boost to the sector.

Stocks to watch in this sector include Malaysia Airport Holdings Bhd and Capital A Bhd. Analysts expect MAHB to break even in 4QFY22, driven by improving air travel demand and international air travel mix for Malaysia and Turkey operations.

The airport operator’s FY23 earnings are expected to be boosted by higher air travel demand and airlines’ capacities.

Meanwhile, Capital A is expected to benefit from the favorable RM/USD exchange rate, jet fuel prices and full 205 fleet of operating aircraft by mid-2023 (103 aircraft as at 3QFY22), enabling the group to take advantage of increasing air travel demand.

Nevertheless, the group is still under PN17 status. Capital A’s management plans to distribute in specie shares of Aviation Group — previously AAX — to its shareholders through a share swap exercise to maintain AAX’s listing status. Hence shareholders of Capital A will subsequently own shares in Capital A and Aviation Group (airlines).

Tourism, hospitality and retail to benefit from reopening of borders

The tourism, hospitality and retail sectors are anticipated to benefit from the reopening of domestic and international borders, as well as the relaxation of Covid-19 restrictions in China.

This is projected to create new job opportunities, stimulate demand for goods and services, and support domestic consumption.

TA Securities Research maintains its buy recommendation on hospitality stocks such as Genting Malaysia Bhd and Genting Bhd, with respective target prices of RM3.20 and RM6.13, citing the promising outlook for the sector.

“All in all, we continue to believe the outlook for the tourism sector, especially travel and hospitality, is promising as people are desperate to travel amid a shortage of flight capacity,” it said.

In the consumer (retail) sector, there is concern that the government may not be able to provide further cash handouts and wage subsidies to further boost consumer spending, due to tight fiscal constraints and the rising interest rate environment are expected to result in lower disposable income.

Nonetheless, the consumer sector is expected to remain resilient due to the subsided fuel and electricity costs, and low unemployment rate, according to JP Morgan Chase & Co.

Meanwhile, Hong Leong Investment Bank (HLIB) Research believes companies that can pivot and provide more convenience to customers will have an advantage in the market.

It expects the consumer sector to continue its solid performance due to robust domestic demand, supply chain improvement that would ease restocking activities, and stabilisation of profit margins as commodity prices will trend lower following price hikes in 2021-2022.

Among the most popular stocks are Mr DIY Group (M) Bhd, Berjaya Food Bhd, QL Resources Bhd, Fraser & Neave Holdings Bhd and Aeon Co (M) Bhd given their defensive nature.

Meanwhile, Public Invest Research said the resurgence of the tourism industry would likely lead to additional jobs and stimulate demand for the sector’s goods and services, supporting the country’s domestic demand.

Considering Malaysia is the second most popular vacation destination for Chinese visitors after Thailand, China’s reopening will be vital to the prognosis for the country’s consumption, it said in a note dated Dec 16.

Banking sector tailwinds to wane in 2023, but banks remain undervalued

After a year helped by tailwinds in the form of interest rate hikes and Malaysia’s strong economic recovery, market watchers expect the sector to be void of positive catalysts to drive up share prices in 2023.

“We expect banking stocks to trade largely sideways in 1H2023 since the appetite for the sector has diminished on a waning outlook. The broader market sentiment remains jittery due to increasingly hawkish central banks around the world, which raises the probability (of banking stocks trading sideways),” HLIB Research analyst Chan Jit Hoong said in a note on Dec 19.

“Furthermore, the tailwinds that were supposed to be enjoyed by banks (like big net-interest margin expansion, strong credit growth) over FY2022-23 have instead been frontloaded to this year, turning the next 12 months less exciting,” he added.

Chan remains ‘neutral’ on the banking sector as his research house sees a decent operational outlook for the sector in 1H2023 and FY2023 sector profit is projected to expand by 14.5%, thanks to the absence of the prosperity tax.

“That said, the sector’s risk-reward profile is balanced, in our view, given dissipating tailwinds are soothed by inexpensive valuations,” he said.

MIDF Research concurred that the banking sector’s tailwinds are diminishing, but maintained its “positive” call on the sector noting that while the valuations are no longer as attractive, not all shares are fully priced in.

“Even though tailwind effects are thinning out, dividend yields offer a safe alternative to riskier sectors,” MIDF Research said in its 2023 Market Outlook report dated Dec 7, 2022.