Investment Highlights

• We maintain our HOLD recommendation with a higher fair value (FV) of RM6.99/share from RM6.57/share for Malaysia Airports Holdings (MAHB) based on 22x PE on FY23F EPS. This is at a 50% discount to the FY23F PE 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. The increase in our FV is based on our expectation of higher FY23F passenger traffic. Our revised FV has incorporated a 3% premium to account for our 4- star ESG rating (Exhibit 7).

• We raise our earnings forecast by 28% for FY22F and 6% for FY23F to reflect expectations of higher passenger traffic following the easing of travel requirements by Malaysia, Thailand and Singapore.

• We recently met up with MAHB’s management for updates. Here are the key takeaways:
  (i) The lawsuit between MAHB and AirAsia (AirAsia and AirAsia X) over unpaid passenger service charges and late payment charges is still ongoing. Nevertheless, MAHB has made provision for the unpaid amounts from AirAsia totalling RM41.5mil. In the event MAHB wins the lawsuit, the provisions will be written back.
  (ii) On March 2022, the Kuala Lumpur High Court has dismissed MAHB’s bid to strike out AirAsia’s claims for operational losses and damages incurred from 2014 to 2018 as a result of disruptions and poor conditions at KLIA2. The lawsuit with claims amounting to RM480mil is still in progress.
  (iii) The Malaysian Aviation Commission is in the process of conducting a review on the new Operating Agreement (OA). MAHB expects the overall process to be completed by June/July 2022. The potential changes to the OA are still uncertain as of now. We are monitoring this development closely. Any favourable changes to the OA on passenger service charges, landing and parking fees as well as to the regulated asset base funding model on airport development could be a positive re-rating for MAHB. 
  (iv) Between 1 and 4 April 2022, 252,730 travellers have crossed Malaysia’s border, with foreign visitors mainly coming in from Singapore, Thailand, Indonesia and India (Exhibit 4). The average daily international passenger movement in April 2022 was slightly above 20,000, 6x compared to 2021.
• Yesterday, Malaysia’s Minister of Health announced that fully vaccinated travellers and children aged 12 and below will be exempted from pre-departure and on-arrival Covid-19 tests starting 1 May 2022. Besides, Covid-19 insurance is no longer required for all arriving passengers (Exhibit 5). This follows Singapore’s move to implement the above measures beginning 26 April 2022.
• In Thailand, fully vaccinated travellers will be exempted from on-arrival testing from 1 May 2022. This has been implemented after the removal of the pre-departure test requirement on 1 April 2022. In addition, mandatory travel insurance requirement (for Covid-19 medical expenses) has been reduced from US$20,000 to US$10,000.

• For China which has adopted a zero-Covid policy, the reopening of its international border remains uncertain due the recent surge in Covid-19 cases.

• Prior to the Covid-19 outbreak, Singapore, Indonesia, Thailand and China were major contributors of foreign tourist arrivals in Malaysia (Exhibit 6). Following the easing of entry requirements in Malaysia, Singapore and Thailand, we expect passenger traffic to pick up, particularly international leisure visitors, due to the lower cost of travel, lifting of the need for quarantine and the easing of Covid-19 test requirements.

• We are projecting MAHB’s Malaysia passenger traffic to rebound by 5x YoY in FY22F and 7x in FY23F from a low base. This translates to 60% of Malaysia’s pre-pandemic passenger traffic in FY22F and 83% in FY23F.

• In Turkey, ISG passenger traffic recovery remained robust as it has benefited from the less rigorous travel restrictions in the region. ISG passenger traffic recovery is seen as closely tracking our FY22F projection of a 43% YoY growth, translating to near 100% of ISG’s pre-pandemic passenger traffic (Exhibit 1).

• MAHB’s fundamentals are improving, premised on the recovery in air travel and tourism sectors as the pandemic gradually comes under control with the large-scale rollouts of vaccination globally.

• However, we believe the market has priced in the recovery of passenger traffic as a result of the easing of travel requirements. As the stock currently trades at an unexciting FY23F P/E of 22x, near its pre-pandemic valuation in 2019, we see the upside potential to be limited at this stage.

Source: AmInvest Research - 28 Apr 2022