RHB Research Institute has maintained its overweight call on the aviation sector, picking AirAsia Bhd as its top buy at an unchanged fair value of RM3.39.
"We like AirAsia for its aggressive expansion plans as its recently-announced dividend policy would see renewed investor interests," it said a research note recently.
The research house said 2012 turned out to be a disappointing year for airlines' earnings following profit downgrades throughout the year, on the back of higher staff and maintenance costs.
While 2013 will see new challenges with Malindo Air's entry set to take a hit on airlines' yields, earnings outlook is more promising.
"Although the emergence of Malindo Air may put yields at risk, 2013 is shaping to be a better year for both AirAsia and Malaysia Airlines (MAS).
"We expect the former to see its earnings grow by 6.9 per cent, on the back of higher contributions from its associates, and the latter to possibly return to the black with a small profit," it noted.
RHB Research expects MAS to chalk up net profits of RM25 million in the financial year ending December 2013 and RM714 million a year later, thanks to its fleet rejuvenation programme and continued attempt to consistently reduce unit costs.
Meanwhile, earnings of Malaysia Airports Holdings Bhd (MAHB) are expected to drop sharply by 43 per cent year-on-year. However, this is not a cause for concern for the airport operator, due largely to accounting treatments of its user fee charge and higher depreciation rate, pending the extension of its airport operating agreement concession.
The research house learnt that the concession agreement will likely be concluded before the commencement of the new low-cost terminal, klia2, on June 28.
"The gauge for improved financial performance for MAHB would be its operating cash flow, which we expect to improve to RM689 million compared with RM643 million in the financial year ended 2012," it said.
RHB Research said Malindo Air's high-cost base could potentially render its low-fare offerings unsustainable.
"While MAS and AirAsia are potential losers from Malindo's entry, we see this as an opportunity for MAHB to expand its revenue base further," it said.
MAHB's operational cash flow is expected to further improve, driven by a stronger 11 per cent passenger traffic growth, coupled with higher passenger spending per passenger.