Investment Highlights

• We maintain our HOLD recommendation with an unchanged fair value (FV) of RM6.99/share for Malaysia Airports Holdings (MAHB) based on 22x 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. Our FV also incorporates a 3% premium to account for our 4-star ESG rating (Exhibit 6).

• MAHB's 1QFY22 core net loss (CNL) of RM118mil came in wider than expectations, vs. our full-year CNL forecast of RM190mil and the full-year consensus net loss of RM109mil. We increase our FY22F CNL by 10% to reflect the slower projected growth of FY22F passenger volume in ISG. Nevertheless, we expect the CNL to be narrower in the subsequent quarters following the reopening of Malaysia’s international borders and easing of entry requirements in MAHB’s key markets.

• YoY, MAHB’s 1QFY22 CNL was halved, mainly driven by a 69% surge in revenue on the back of a 2.5x increase in the group’s passenger traffic. This was mainly contributed by a 5x YoY improvement in passenger movements locally following the reopening of interstate borders and relaxed rules for fully vaccinated Malaysian residents to travel abroad from 11 October 2021 onwards. Meanwhile, passenger movement in ISG registered a steady growth of 52% YoY (Exhibit 2). This translated to 33% of its pre-pandemic passenger traffic at local airports and 79% of ISG.

• QoQ, MAHB’s CNL narrowed by 13% in 1QFY22 mainly due to a 24% increase in Malaysia’s passenger volume and lower unrealised loss on forex translation in respect of forex for VAT receivables (RM5mil in 1QFY22 vs. RM28mil in 4QFY21) for its operation in Turkey.

• Following the reopening of Malaysia’s international borders in early April 2022, international passenger movements surged 6x YoY to a new high (since April 2020) of 642,000 in April 2022, translating to 14% of the pre-Covid level.

• However, total passenger volume in April 2022 fell by 8% compared to March 2022 due to lower air travel demand from domestic passengers during the Ramadan fasting month in both Malaysia and Turkey.

• 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, the 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, we lower our ISG passenger traffic forecast for FY22 by 7% due to slower growth in passenger volume in the first 4 months of FY22, partially mitigated by the potential increase in international passengers after the opening of a new metro station at ISG by July 2022. This translates to 93% of ISG’s pre-pandemic passenger traffic (Exhibit 1).

• Key takeaways from MAHB’s analyst briefing yesterday:
  (i) MAHB has access to RM6.5bil funding comprising: (1) RM1.325bil in ready revolving credit facilities; and (2) RM5.2bil unutilised sukuk facility. It also reiterated that it continues to enjoy the indefinite deferment of ISG's utilisation fees of €115mil (RM562mil) for FY2022.
  (ii) Following Malaysia's full relaxation of border restrictions for vaccinated travellers in 2QFY22, average daily international movements in May 2022 has reached 20% of pre-pandemic levels. By July 2022, international airline seat capacity is expected to recover to at least 50% of 2019 levels. Meanwhile, the domestic seat capacity from July 2022 is nearing 90% of 2019 levels, with further upward adjustment to new slot filings.
  (iii) The opening of regional key markets with fewer travel restrictions (such as Indonesia, Thailand and Singapore) will spur further recovery (Exhibit 5).
  (iv) As a result of increasing demand for international flight, local airlines in Turkey (including Pegasus and AnadoluJet) have opted to reduce domestic frequencies in favour of international frequencies due to limited slots. Hence, we saw higher international seats of 3.2mil, which surpassed pre-Covid levels (1QFY19) of 3.0mil. The higher revenue yield from international passengers has accelerated ISG’s profitability. Furthermore, the opening of a new metro station at ISG by July 2022, with better access to downtown Istanbul (European side of Turkey), will serve as a catalyst to increase international passengers.
  (v) MAHB recently discussed the operating agreement (OA) with the Ministry of Transportation. We understand that the OA will be presented to Cabinet soon. The overall process is expected to be completed by June/July 2022.

• MAHB’s fundamentals are improving, premised on the recovery in air travel and tourism sectors as the pandemic gradually comes under control with 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 PE of 21x, near its pre-pandemic valuation in 2019, we see the upside potential to be limited at this stage.

Source: AmInvest Research - 31 May 2022