Highlights

• We expect continued growth in air travel demand in 2018 to benefit MAHB and AirAsia . The growth will be driven by international traffic from the rebound in tourist arrival growth (after slow growth in 8M17) and continued strong demand from local Malaysians (especially for oversea travelling), as consumer sentiment continue to improve.

• We have imputed passenger traffic growth of +6.0% and +4.8% for MAHB for 2018 and 2019.

• Overall capacity growth in the system to be c.6-7% yoy (MAS: 3% yoy; MAA: 12-15% yoy; AAX: 8-10% yoy; Malindo: 5-10% yoy) in 2018. We expect the additional capacity to be well absorbed by the growth in demand, especially by the locals on improving consumer sentiment and better economic outlook.
• Given a balance growth of supply-demand environment in 2018, we expect yield to sustain into 2018. The aggressive capacity growth by AirAsia Group may compel AirAsia to extend its promotional fares as part of its load active strategy. However, we do not expect material drop in AirAsia’s average yields in 2018, given the slowing capacity growth and capacity redeployment by its competitors.
• Jet fuel price (in tandem with crude oil price) has risen to US$75/bbl in recent month, due to tighten supply (Libya and Northsea pipelines outage). We expect the price to trend lower to average US$65-70/bbl in 2018 as global crude oil supply normalizes back in Jan 2018 and non-OPEC oil nations taking opportunity to increase productions. AirAsia Group has hedged only 16% of its requirement in 1H18 at US$62/bbl, as the group expects jet fuel prices to trend down in 1H18.

• Net impact of RM appreciation on aviation players differs:- 1) MAHB: Negative impact from the expected lower translated earnings contribution of ISGA in EU€. 2) AirAsia: Positive impact from higher operational cost structure (jet fuel, maintenance and debts) denominated in US$, which would be partially offset by the rise in average jet fuel prices in 2018.

Risks

• World crisis (i.e. war, tourism and epidemic outbreak), close down of airports, high jet fuel price and the development of high speed train between Singapore and Pulau Pinang.

Forecasts

• MAHB – Raised FY18-19 earnings by 6.9% and 3.2%.

• AirAsia – Raised FY18-19 earnings by 1.3% and 0.8%.

Rating

Overweight ↔

• Demand for air travel is expected to remain on the uptrend in 2018-19, benefitting the aviation sector.

Valuation

• Maintain BUY on MAHB with higher TP of RM10.00 (from RM9.60) based on DCFE. MAHB is benefiting from rising air travels in Malaysia and rebound in ISGA.

• Maintain BUY on AirAsia with higher TP of RM4.18 (from RM4.10) based on SOP. AirAsia is benefitting from the growing air travel by the locals, sustaining yields and RM appreciation. The asset monetization and IPO exercises will improve AirAsia cash level and potentially higher dividend.

Source: Hong Leong Investment Bank Research - 11 Jan 2018