• MYAirline effectively contributed 2% of MAHB’s core EPS in 1H23, while a potential bad debt write-off may hit c.3% of FY23F core EPS (our estimates).

• A hypothetical 1-year delay in effecting MAVCOM’s proposed landing and parking charge tariff increases may also reduce our FY24F core EPS by 2%.

• Reiterate Add, with SOP-based TP of RM7.76; the above downside risks are manageable in our view, and there are several re-rating catalysts for MAHB.

MYAirline Closure a One-off Event; Other Airlines Not at Risk

• MYAirline suspended its operations yesterday, without any obvious route to restarting operations since discussions with possible white knights had reportedly fell through, according to The Edge. In 1H23, MYAirline had a 7.3% market share of domestic airline seat capacity, as it flew from KLIA’s second terminal (KLIA2) to Kota Kinabalu, Kuching, Tawau, Sibu, Miri, Kota Bahru, Langkawi and Penang. MYAirline only began flights to Bangkok, its sole overseas destination, from 28 Jun 2023 onwards, so it did not contribute to MAHB’s international business in 1H23.

• We estimate that, in 1H23, MYAirline contributed to Malaysia Airports Holdings (MAHB) RM7.6m in domestic passenger service charge (PSC) and RM4.6m in aircraft landing revenue, for a total of RM12.2m, or 5.4% of MAHB’s group core net profit in 1H23. However, these domestic passengers are not lost to MAHB as we believe the vast majority will merely use other airlines that already offer services to those same cities; MYAirline’s domestic routes in Malaysia are widely served by its competitors.

• We expect domestic airfares to increase as MYAirline’s competitors had been offering low airfares on MYAirline’s routes, probably to force MYAirline out of the market, in our view. With MYAirline out of the way, AirAsia (CAPITALA MK, Not Rated), Malaysia Airlines (Unlisted), and Batik Air Malaysia (Unlisted) may raise their domestic ticket prices. This could have the effect of reducing discretionary demand for domestic air travel. But we do not expect this negative impact, if any, to be significant, especially since five of the eight cities served by MYAirline connect West Malaysia to East Malaysia, where there are no alternative means of transportation.

• As for MYAirline’s aircraft landing revenue, we believe that this will most likely be lost to MAHB in the near term, as domestic flights in Malaysia are only operating at a seat load factor of c.75%. Hence, MYAirline’s competitors will probably use the opportunity arising from MYAirline’s demise to increase their seat load factors on their existing domestic flights and improve their individual profitability, rather than to deploy additional flights. However, the portion of aircraft landing revenue that may be lost only made up 2% of MAHB’s group core net profit in 1H23, according to our calculations.

• The main negative impact to MAHB is from a potential bad debt write-off of MYAirline’s dues to MAHB, which we estimate could impact our FY23F group core net profit by c.3%. We have not reflected any bad debt write-offs or loss of aircraft landing revenues into our financial forecasts for now. In conclusion, we think that the closure of MYAirline will have a negligible long-term impact to MAHB.

• We think Malaysia’s established airlines are not at risk of failure, given rising international travel and strong forward bookings. Relative newcomer SKS Airways (Unlisted) whose financial health is unknown, only has a 0.1% domestic market share.

• Potential re-rating catalysts: signing of the new Operating Agreement (OA) by end- 2023F; higher aeronautical tariffs to be announced by MAVCOM, the aviation regulator, hopefully by end-2023F; rise in international air travel as airlines restore their seat capacities; and recovery in commercial rentals as MAHB terminates rental discounts from 1 Jan 2024F and more airport shops reopen (see 13 Sep 2023 report).

• Downside risks: MAVCOM’s proposed landing and parking tariff increase from 1 Jan 2024F may be delayed, as the regulator has not issued its final proposals, which also needs to be gazetted in Parliament. A hypothetical 1-year delay may require a 2% cut in our FY24F core EPS estimate, which is not material, in our view. We believe that the OA-driven Benchmark PSC hike of c.8.5% (our estimate) in Feb 2024F is not at risk.

Source: CGS-CIMB Research - 13 Oct 2023