We expect a mediocre air travel demand growth at 3.1% YoY in 2019, after disappointing at +2.6% YoY in 2018, affected by cautious domestic sentiment, while airlines have been cutting capacities since mid-2017. The improving international/ASEAN pax mix will partially cushion the disappointing pax growth. We maintain NEUTRAL rating on the Aviation sector, with HOLD recommendation on MAHB (TP: RM7.50) due to concerns on the implementation of RAB and AREIT; and BUY on AirAsia (TP: RM3.65) as the airline benefits from declining oil price, increasing market share and strong balance sheet.

Mediocre air travel demand growth. For 11M18, MAHB only registered pax movement growth of +2.5% YoY, below HLIB expectation of 6.0% YoY for 2018. The disappointment was due to cautious sentiment following the recent change of government, while Malaysia based airlines (i.e. MAS and Malindo) was cutting capacities since mid-2017. The slower growth may affect airlines’ ability to increase yields and pass-on the new departure levy (for international/ASEAN outbound air travellers). We now project lower growths of +2.6% YoY for 2018 (from +6.0% YoY) and +3.1% YoY for 2019 (from +4.2% YoY).

Favourable pax mix. For 11M18, pax mix from international segment (ASEAN and ex-ASEAN) has improved to 52.5% share and domestic segment at 47.5% (vs. 51.4%:48.6% in 2017 and 48.6%:51.4% in 2016). The higher international pax mix provides higher average revenue/pax for airlines (higher ticket prices and ancillary spending for international flights) and airports (higher airport tariff and retail spending by international pax). We expect continued improving mix from international segment in 2019-20 as Malaysia based airlines are focusing capacity on international routes.

OA/RAB/AREIT. Details of the new Operating Agreement (OA) and RAB are still being finalized between MAHB with MOT and MOF. At current juncture, MAHB is being tasked to undertake the necessary airport capex under RAB. However, the proposed AREIT is meant to fund airport expansions in Malaysia and maintain MAHB as an asset light operator. Details of AREIT have not been revealed. MAHB is of the view that RAB structure is not compatible with the proposed AREIT structure.

Fuel price. Jet fuel price has declined to USD70/bbl (from high of USD100/bbl in Oct 2018), in line with the downtrend of Brent oil price. We expect oil price to average at USD68/bbl in 2019 (vs. USD71.7/bbl in 2018), benefiting airlines in term of lower operating costs. AirAsia has hedged 48% of its 1Q19 fuel requirements at USD67/bbl (Brent) and 27% of 2Q19 at USD65/bbl (Brent).

Maintain NEUTRAL. We maintain Neutral on Aviation sector, given the mediocre pax growth and current uncertainty of government policy. Maintain HOLD on MAHB (TP: RM7.50) and BUY on AirAsia (TP: RM3.65).

MAHB. Maintain HOLD recommendation on MAHB with unchanged DCFE-derived TP of RM7.50. We have previously cut our TP post earnings revisions (Strategy Report dated 19 Dec 2018). The slower pax growths and higher cost will affect MAHB’s near term earnings, being partially cushioned by the unutilized RM550-600m tax credit, following the change in tax treatment for KLIA2. MAHB long term outlook remains uncertain under the upcoming RAB structure and the proposed AREIT.

AirAsia. Maintain BUY recommendation on AAG with unchanged TP of RM3.65 based on 10% discount to SOP of RM4.05. We have previously cut our TP post earnings revisions (Strategy Report dated 19 Dec 2018). We maintain positive outlook on AAG, given: (1) declining jet fuel price; (2) potentially higher yield in view of competitors cutting capacities; and (3) strong balance sheet position with net cash of RM1.1bn as at end Sep 2018.

Source: Hong Leong Investment Bank Research - 9 Jan 2019