Investment Highlights

• We downgrade Malaysia Airports Holdings (MAHB) from BUY to HOLD with an unchanged fair value (FV) of RM7.45/share, pegged to FY23F PE of 25x, mainly due to limited upside of 7% following the share price rally over the last 2 months. Our target PE is based on 1 standard deviation above its 2-year FY18–FY19 pre-pandemic average of 22x, underpinned by a rebound in passenger traffic and positive long-term outlook from multiple growth strategies on the cards.

• Our FV also incorporates a 3% premium to account for an unchanged 4-star ESG rating (Exhibit 5), underpinned by the group’s initiatives to increase the usage of renewable energy.

• We slightly fine-tuned FY22F earnings by -2% to account for updated passenger traffic assumptions following the recent announcement of December 2022 airport traffic data. Nevertheless, our FY23F-FY24F earnings are maintained as we retain our traffic assumptions which already factored in an impending air travel recovery.

• MAHB concluded FY22 on an upbeat note, with full-year passenger traffic (including Malaysia and Turkiye operations) reaching 83.9mil passengers. This translates to a substantive YoY rebound of 2.3x compared to 36.1mil passengers in FY21, as well as a rock-solid post-pandemic recovery to 59.4% of 2019 levels.

• Meanwhile, airports in Malaysia continued to demonstrate resiliency as FY22 passenger movements improved to 52.7mil passengers. This also represents a multifold YoY growth of 4.9x compared to 10.7 mil passengers in FY21 and 50% recovery rate compared to 2019 levels (105.3 mil passengers).

• Nevertheless, we highlight that Malaysian passenger traffic fell short of our earlier projections of 57.9 mil by 9%. We believe the underperformance mainly stems from a combination of slower-than-expected air travel recovery and airline hiccups in ramping up seat capacity amid persistent capacity bottlenecks in worldwide aircraft maintenance, repair and overhaul services industry.

• On a more positive note, we maintain Malaysian traffic projections of 82.1 mil passengers for FY23F (78% of 2019 level) and 107.4mil for FY24F (102% of 2019 level), underpinned by a robust recovery in global air travel demand in the aftermath of demand disruption induced by the pandemic.

• We also remain optimistic on China’s border reopening since January 2023, which would further spur air travel recovery. Recall that Chinese passengers accounted for 11% of Malaysia passenger traffic back in 2019.

• On the other, operations in Istanbul Sabiha Gokcen International Airport (SGIA) also posted a higher passenger traffic of 31.2mil passengers (+23% YoY) in FY22, reaching 87% of the 2019 level. Thus, buoyed by an improving sector outlook, we expect passenger throughput at SGIA to increase by 6% YoY to 33mil in FY23F (101% of 2019 level) and 9.5% to 36.2mil in FY24F (110% of 2019 level). Separately, we also noted that SGIA was mostly unaffected by the recent earthquakes in south-eastern Turkey, which are located 1,080KM away from the airport.

• Meanwhile, the group has received the government’s in-principal approval of new terms for the new Operating Agreement (OA 2023) on Thursday (9 February 2023). We understand the new terms are mostly related to the funding mechanism of future airport developments. The new terms also include flexibility in funding future airport developments either by the government or MAHB (compensated via returns on investment-based approved weighted average cost of capital).

• We view the in-principle approval positively, which paves the path for the finalisation of OA 2023 that could introduce a cost-based regulated asset base (RAB) framework in setting airport tariffs. Recall that the first consultation paper released by the Malaysia Aviation Commission (Mavcom) back in August 2022 proposed to keep airport tariffs at current levels after adjusting for inflation rates for the first regulatory period (RP1) spanning from 2023 to 2025 with the RAB framework coming into force in the RP2 from 2026 to 2028. Mavcom is expected to release the second consultation paper which will unveil further details of the RAB.

• We continue to expect MAHB to return to profitability over the upcoming quarters, supported by higher passenger volumes and leaner cost structures. Moreover, we also anticipate an exceptionally stronger QoQ improvement in 4QFY22 earnings in Malaysian operations due to seasonally higher passenger traffic as well as a favourable recovery in the international-domestic mix.

• MAHB’s earnings outlook is gradually improving, premised on a recovery in air travel and tourism sectors as the pandemic comes under control with large-scale vaccination rollouts and international borders reopening globally. The stock currently trades at a FY23F PE of 24x, vs its 2-year (FY18–FY19) pre-pandemic peak of 27x.

Source: AmInvest Research - 10 Feb 2023