Despite a mild pax growth of +1.6% YoY in 5M18, w e maintain our growth expectation of +6.0% YoY in 2018, banking on stronger pax growth in 2H18, post Ramadhan period. The improving international pax mix also benefits the sector on higher revenue and margin, especially for MAHB. AirAsia will also be able to increase yields and improve efficiency to offset the impact from the higher jet fuel price. Maintain OVERWEIGHT rating on Aviation sector with BUY recommendation on MAHB (BUY, TP: RM10.00) and AirAsia (BUY, TP: RM4.65).

MAHB (BUY; TP:RM10.00)

Improving passenger mix. Despite the mild pax growth of +1.6% YoY in 5M18 for Malaysia operation, international pax has grown by +7.3% YoY as opposed to domestic pax decline of 4.0% YoY. Hence, international pax mix has improved to 52.8% (5M18) from 50.0% (5M17) and MAHB fetches higher margins from international pax due to higher passenger tariff and spending nature (access to alcohol and tobacco products). We expect this trend to persist as domestic airlines (AirAsia, MAS and Malindo) continue to focus on international route expansion and foreign airlines increase connectivity into Malaysia. Moreover, we expect MAHB pax growth to catch up in 2H18 onwards post Ramadhan period, in order to meet our +6.0% YoY growth expectation in 2018.

PSC status quo. PSC status remains unchanged until further review by the new MOT and MAVCOM. MAHB is still charging RM50 for non-ASEAN international pax in KLIA2 and claiming loss of revenue in terms of MARCS from the government, while PSC benchmark continuity under new OA framework and IBR mechanism is still subject to review. MAHB is positive that its position will not be deteriorated.

Maintain BUY, TP: RM10.00. We maintain BUY recommendation on MAHB with unchanged DCFE-derived TP: RM10.00. MAHB is benefiting from the increasing air travel demand (especially for international travel) and the on-going development of KLIA Aeropolis. The recovery of ISGA traffic has improved its outlook and potential monetizing of ISGA investment will unlock valuation.

AirAsia (BUY; TP:RM4.65)

Increase in jet fuel price. In tandem with the increase in global crude oil price, jet fuel price has increased to above US$85/bbl (we have already assumed US$85/bbl for FY18). Jet fuel cost constitutes c. 42% of AirAsia operating cost structure. We are not overly concern on the increase in cost structure, as we expect AirAsia to improve its operating efficiency, while increasing its yield and ancillary income to offset the higher jet fuel cost.

Rising yields environment. Based on MAVCOM outlook for 2018, airlines capacity is expected to increase marginally by +2.2% YoY, while passenger demand is expected to increase by +6.5%-7.0% YoY. Given the demand growth is higher than the capacity growth, yields are expected to increase. AirAsia is expected to be the main beneficiary from rising yields given its command of more than 50% market share in Malaysia and capacity expansion of more than 10% (indicating both MAS and Malindo are maintaining/reducing capacity). KLIA2 registered pax growth of +9.4% YoY in 5M18.

Maintain BUY, TP: RM4.65. We maintain BUY recommendation on AirAsia with unchanged SOP-derived TP: RM4.65. We remain positive outlook on AirAsia, given: (1) strong air travel demand and high load factors; (2) higher yields to offset the current high jet fuel price; and (3) expected high dividend payout by end 2018.

Source: Hong Leong Investment Bank Research - 4 Jul 2018