Investment Highlights

• We maintain HOLD on Malaysia Airports Holdings (MAHB) with a slightly lower fair value (FV) of RM6.80/share (from RM6.99/share previously), pegged to FY23F PE of 22x, its 2-year FY18–FY19 pre-pandemic average. Our FV also incorporates a 3% premium to account for an unchanged 4-star ESG rating (Exhibit 6), underpinned by the group’s initiatives to increase the usage of renewable energy.

• We maintain our FY22F core net profit (CNP), which assumes steady improvements in passenger traffic from both its Malaysia and Turkey operations. However, we trim FY23F–24F CNP by 3–9% after fine-tuning our passenger movement assumptions while imputing higher maintenance costs and overheads in line with the stronger passenger volume.

• MAHB’s June 2022 statistics showed that total passenger volume from its network of airports in 1HFY22 jumped 2.9x YoY, translating to an impressive recovery to 50% of 1HFY19 levels from just 18% in 1HFY21 (Exhibit 1).

• 1HFY22 domestic passenger movements surged 2.7x YoY to 23.4mil (66% of 2019 levels) while international passenger movements expanded by 3.3x YoY to 10.7mil (33% of 2019 levels).

• Notably, daily international passenger movements across its airports in Malaysia averaged 43K in June 2022 which made up 29% of June 2019 level. This is set to rise further with increasing seat capacity by airlines in anticipation of more robust air travel demand. We gather that domestic seat capacity is expected to reach 90% of pre-Covid levels and 50% for the international segment from July onwards.

• Meanwhile, Istanbul Sabiha Gokcen International Airport’s (SGIA) 1HFY22 statistics continued to demonstrate resiliency with a total passenger movement of 13.8mil, equivalent to a commendable 83% of 2019 levels. We reckon that passenger traffic could rise in the coming months, coinciding with the beginning of summer and school holidays in Turkey.

• Moving forward, we foresee a sequential recovery in international passenger movements, particularly for Malaysian airports. Nevertheless, a fresh wave of Covid restrictions in China, which was the second largest international passenger volume contributor at 11% in 2019, is expected to dent traffic recovery.

• All in, we project Malaysia’s FY22F passenger traffic to rebound by 5x YoY to 63.2mil from a low base of 10.7mil in FY21, subsequently increasing by 37% YoY to 86.3mil in FY23F (Exhibit 2). This translates to a recovery to 60% of 2019 levels for FY22F and 82% for FY23F. As a comparison, the International Air Transport Association (IATA) projected more bullish overall air traveller numbers that could reach 83% of 2019 levels in 2022, 94% in 2023 and 103% in 2024.

• MAHB also targets to rejuvenate its non-aeronautical operations (mainly rental and royalties from leasing airport space as well as retail of duty-free and non-dutiable goods), to spur further earnings growth. This segment, which contributed 48% of 1QFY22 total revenue, grew by 42% YoY compared to 1QFY21. Key growth strategies adopted by the group for this segment include the ongoing “Commercial Reset” programme, which would help unlock additional commercial spaces to bring in new tenants as well as floor optimisation to attract more traffic to low footfall areas. Moreover, to enhance its commercial occupancy rate, which currently stands at above 60% versus 81% in 2019, the company also adopted a new rental model which ties tenants’ rental rate to the recovery rate of passenger traffic volume compared with 2019 levels.

• Meanwhile, the Malaysian Aviation Commission (Mavcom) is still in the process of conducting a review on the new operating agreement (OA), of which MAHB expects to be completed by the second half of 2022. Despite a lack of clarity at this juncture, we opine that any changes in the OA terms that include passenger service charges, landing and parking fees as well as the regulated asset base funding model on airport development may lead to a positive change to MAHB’s fundamentals. Even so, a significant pushback from the travel industry could emerge for any cost increase as airlines are still loss-making.

• MAHB’s earnings outlook is gradually improving, premised on the recovery in air travel and tourism sectors as the pandemic gradually comes under control with large-scale rollouts of vaccination and international borders reopening globally. As the stock currently trades at a fair FY23F PE of 22x – on par with its 2-year FY18–FY19 pre-pandemic average – we view the upside potential to be limited at this stage.

Source: AmInvest Research - 25 Jul 2022