Highlights/ Comments

Newly launched VMY 2014 campaign is expected to boost tourist arrivals in 2014. However, tourist commonly prefers to travel with their own country airlines, and hence domestic airlines (MAS and AirAsia) are not expected to fully benefit from VMY2014.

Air travel demand from local Malaysian is expected to be dampened by increasing cost of living and negative sentiments, due to subsidies cut and the anticipated GST implementation by April 2015.

Hence, airlines are expected to price their products competitively in order to induce more air travels and improve their load factors (active load-passive yield strategy). Further yield compression is imminent, as airlines increase capacity amid the need to ensure high load factors and grab/defend market share.

The higher jet fuel price at US$125/bbl (expected to increase further) will affect airlines’ profitability, as jet fuel cost accounts for 40% (FSC) to 60% (LCC) of operational cost (ex-depreciation, lease and interest cost).

RM depreciation against US$ will also impact airlines’ margin, as large part of their operational cost (i.e. aircraft lease, maintenance etc) is dominated US$.

Airport operator MAHB (monopoly of Malaysia airports) is the main beneficiary from VMY 2014, airlines’ capacity expansion and load active strategy (induce local demand). MAHB is not affected by competition, high fuel price and US$ appreciation.

Commencement of KLIA2 by mid-2014 is expected to further boost MAHB’s earnings, through retails and commercial revenue.

Risks

World crisis (i.e. war, tourism and epidemic outbreak), delay in KLIA2 completion, high jet fuel price and the development of high speed train between Singapore and Pulau Pinang. Forecasts

We have fine-tuned MAHB, AirAsia and MAS forecasts. MAHB’s FY13-15 earnings adjusted by -1.5%, -12.8% and +3.3%; AirAsia’s FY13 earnings unchanged and adjusted by -6.7% and -8.8% for FY14-15; while MAS remain in losses of RM999m, RM516m and RM124m for FY13-15.

Rating

NEUTRAL

Positives –

• Strong growth in passenger movements.
• Liberalization of ASEAN open sky policy.

Negatives –

• High jet fuel cost.
• Yield pressure due to overwhelming capacity growth.

Valuation

We have rolled-forward our valuations into 2015.

• MAHB: Maintained Buy with higher TP: RM9.75 based on FY15 DCFE.
• AirAsia: Maintained Hold with higher TP: RM2.45 based on FY15 SOP.
• MAS: Maintained Sell with higher TP: RM0.27 based on 7.0x adjusted FY15 EV/EBITDAR.

Source:Hong Leong Investment Bank Research - 10 Jan 2014