Disregard your first point. People who think this is offensive because it sexualizes women have a sexist, outdated mindset that someone on the internet can't fix. Your second point isn't the reason this is immoral. You are setting up a strawman that everyone already agrees is wrong. But it's close.

You can't oversimplify the problem. Do I think it's silly to give out the scholarship for a beauty pageant instead of basing it on a rational, merit-based approach? Yes. But the women who participate in these pageants aren't hardcore rationalists that post long winded arguments on the internet. They are the kind of outdated feminists that consider sexualization to be empowering if they own it. A scholarship as a reward reasonably fits into that narrative of female power and it also helps perpetuate the culture that they find power in.

However, in this situation they ceased to own their own sexuality. It's not a rational distinction, but it is a clearly defined one that anyone who doesn't live under a rock understands. If you're objectified by a man, you are made smaller. But if you objectify yourself, you are made bigger. It's stupid, but a lot of women clearly believe it.

There was an implied contract here that the pageant would uphold that shared narrative of dignifying their sexuality in a social setting. They had all agreed to that contract. By surprising them with this cheap whore-fest, contest management objectified them in a way that they did not agree to and did the opposite of what it promised to do in the contract. And that is a very rationally immoral act.

So you don't have to find it disgusting for the reason most people do, but you should still find it disgusting. Obviously, I'm all for women whoring themselves out in most situations. But here, they were manipulated and forced into a situation they didn't agree to and socially pressured into performing to save face or to avoid forfeiting something they'd already invested a lot of effort into.