Investment Highlights

• We maintain our HOLD recommendation and fair value (FV) of RM6.57/share for Malaysia Airports Holdings (MAHB) based on 22x FY23F EPS. This is at a 50% discount to the FY23F P/E of 44x of its peer, Airports of Thailand (AoT), to reflect Malaysia’s smaller tourism market vs. that of Thailand and a higher operating risk of MAHB’s Sabiha Gokcen International Airport (ISG) in Istanbul, Turkey. Our FV also incorporates a 3% premium to account for our 4-star ESG rating (Exhibit 7).

• MAHB's FY21 core net loss of RM788.7mil came in within our expectation of RM807.3mil net loss but 7% below consensus estimates. Thus, we maintain our forecast.

• MAHB’s FY21 revenue fell by 10% YoY on the back of a 16% decline in passenger traffic, mainly due to a 58% YoY contraction in passenger movements locally amid dampened air travel demand caused by Covid-19 travelling restrictions. This is partly offset by a much stronger 47% YoY increase in passenger movement in ISG.

• Overall, its FY21 total passenger traffic translated to only 10% of its pre-pandemic passenger traffic at local airports and 70% of ISG (Exhibit 2).

• In 4Q21, revenue grew doubled YoY mainly due to a 2.9x surge in passenger traffic in Malaysia following the reopening of interstate borders and relaxed rules for fully vaccinated Malaysian residents to travel abroad from 11 October 2021 onwards.

• Moving forward, we are optimistic on the recovery in passenger traffic as movement restrictions are gradually relaxed, acceptance of digital or vaccines certificates, umrah travel and travel bubbles such as the vaccinated travel lane (VTL).

• In February 2022, the National Recovery Council has proposed for our borders to be fully opened in 2Q22, which will expedite the recovery of passenger traffic.

• We are projecting MAHB’s Malaysia passenger traffic to rebound by 4x YoY in FY22F and 7x in FY23F from a low base. This translates to 50% of Malaysia’s pre-pandemic passenger traffic in FY22F and 80% in FY23F.

• The rebound will be underpinned by a sharp recovery from domestic passenger traffic assumptions from 4QFY21 onwards, as well as slower but gradual recovery from international passenger traffic.

• In Turkey, ISG passenger traffic recovery remained robust as it benefited from less rigorous travel restrictions in the region. We believe ISG passenger traffic recovery is on track and in line with our FY22F projection of a 43% YoY growth, translating to close to 100% of ISG’s pre-pandemic passenger traffic.

• Key takeaways from MAHB’s analyst briefing yesterday:
  (i) MASB achieved core operational costs savings with a FY21 reduction of 11%, in line with the group’s cost containment initiatives such as reducing staff costs and cutting utilities cost. Commencing 1 July 2021, the operation of cooling energy supply joint venture (JV) between MAHB and Tenaga Nasional will reduce its local energy costs by more than RM50mil annually, moving from fixed to variable charges with overall lower tariffs of RM43/kwh from RM94/kwh.
  (ii) The group will continue to focus on expanding non-aero business through commercial resets and airport regeneration. As at FY21, more than 70% of commercial contracts were reset. This will stimulate capex investments by tenants while attracting higher rental yields. Under the regeneration plan, Subang Airport plans to unlock additional gross floor area of 8mil sq ft with over 3,500 acres of prioritised development within KLIA Aeropolis and additional 550 acres to be developed at Airport Land @ ASZ2. The main developments under the regeneration plan are maintenance, repair and overhaul (MRO), air cargo, logistics, aerospace and aviation.
  (iii) Following the high vaccination rates in the Asean region, the majority of Asean countries are likely to relax travel restrictions on 2H2022. Meanwhile, other key markets including the Philippines, Taiwan, Saudi Arabia, Qatar and the United Arab Emirates have already opened air travel. In EMEA, the borders are largely open despite varying vaccination rates. 
  (iv) The impact of the Russia-Ukraine conflict is insignificant to MAHB as ISG annually serves 200,000 of Ukrainians and 500,000 of Russian, translating to only 10% of ISG’s international passengers and 3% of its total passengers in FY21.
• We believe MAHB’s fundamentals remain strong, premised on:
  (i) the recovery in air travel and tourism sectors as the pandemic gradually comes under control with the large scale rollouts of vaccination globally;
  (ii) the group’s good proxy to a rebound in consumer confidence given its airport dominance locally with a significant market share in Turkey; and
  (iii) its strategic position in the economy which warrants firm support from various stakeholders to weather through the pandemic and the current downturn in the air travel market. 
• However, as the stock currently trades at an unexciting FY23F P/E of 21x, near its pre-pandemic valuation in 2019, we believe the company’s upside is limited at this stage.

Source: AmInvest Research - 1 Mar 2022