Investment Highlights

• Strong air travel demand. The International Air Transport Association (IATA) reinstated its positive outlook in the recovery of global air travel demand in 2023 backed by encouraging January traffic data. According to the Canada-based trade organisation, total traffic in January 2023 (as measured in revenue passenger kilometers or RPKs) rose 67% YoY compared to January 2022. It also estimates that January 2023 global traffic has reached 84.2% of 2019 levels, largely driven by the reopening of China’s domestic market. Recall that IATA projects global passenger traffic to return to 2019 levels in 2024 and grow steadily thereafter at an average annual growth rate of 3.3% to eventually reach 8bil passengers per annum in 2040.

• Steady recovery in passenger movements. After a strong rebound in Malaysia Airports’ 2022 passenger traffic (including 39 airports under management across Malaysia) by 4.9x YoY to 52.7mil, we foresee passenger movements to grow further in 2023 backed by accelerating international tourism activities. We forecast Malaysia Airports’ FY23F group passenger traffic to rise by 56% YoY to 82.1mil and subsequently by 31% YoY to 107.4mil in FY24F. This translates to a significant recovery to 78% of 2019 levels for FY23F and 102% for FY24F.
  MAHB’s airports in Malaysia also posted resilient performances in January 2023, with passenger movements growing by 2.3x YoY to 6.3mil compared to January 2022. This also represents a 75% recovery to January 2019 traffic. In comparison, the Malaysian Aviation Commission (Mavcom) forecasts Malaysia’s air passenger traffic in 2023 to increase by 40%-52% YoY, translating to 74.6mil-80.8mil passengers on the back of the impending recovery in international passenger traffic.

• Framework of aviation service charges to be finalised soon. Mavcom is on track to finalise the framework of aviation service charges (also known as airport tariffs) by the end of 2023 following the release of its second consultation paper recently. Despite limited clarity, especially on the potential roll-out of the cost-based regulated asset base (RAB) framework in setting airport tariffs, we reckon that the current tariffs in real terms (adjusted for inflation rates) will be kept at current levels in the regulatory period 1 (RP1) from 2024 to 2026 or at least until Malaysian aviation sector achieves full recovery from the pandemic. This is because Mavcom reiterates the need to defer the imposition of the RAB framework in RP1 which may inflate airport tariffs significantly amid the partial recovery of passenger traffic. This stems from a higher regulated revenue per passenger due to a stable revenue base being borne by an extremely low number of passenger movements.
  Other salient highlights from the consultation paper include the proposal to keep the loss capitalisation mechanism (LCM), which allows MAHB to recoup losses from the unchanged airport tariffs by up to 90%. In addition, Mavcom proposed to allow MAHB to recover high-priority capex incurred in RP1 by raising airport tariffs immediately in RP2 (2027-2029). Mavcom also completed a financeability test which suggests that MAHB’s credit rating/worthiness would be largely unaffected from the deferment of the RAB framework.

• Maintain NEUTRAL on the sector. We believe the aviation sector will continue to ride on the imminent recovery in air travel demand, which is widely anticipated to reach pre-pandemic levels by 2024. We prefer airport operator Malaysia Airports (HOLD, RM7.45) as a direct proxy to the robust recovery in Malaysia’s air travel demand, which is on track to return to the black in FY23F, supported by higher passenger volumes and leaner cost structures.
  We also like Perak Transit (BUY, RM1.62), which offers investors a good opportunity to own a defensive public infrastructure business while capitalising on the company’s resilient growth from (i) steady improvement in occupancy rates and footfalls at Terminal Meru Raya and Kampar Putra Sentral, (ii) Bidor Sentral’s maiden earnings contribution, which is expected to kick in from 2HFY23 onwards, and (iii) collaboration with edotco Malaysia to construct telecommunication towers in Perak.

Source: AmInvest Research - 22 Mar 2023