Maintain OVERWEIGHT rating on Aviation sector with top pick on AirAsia. We remain positive on AirAsia (BUY: TP: RM3.35) for its 1) high load factor; 2) improving yield and ancillary income; and 3) upcoming attractive 90 sen/share dividend. On the other, we have HOLD recommendation on MAHB (TP: RM7.80) as we believe MAHB’s upside is relatively capped by the continuous review on RAB structure.

AirAsia (BUY; TP: RM3.35)

Yield improvements. Based on AirAsia Group (AAG) aircraft delivery schedules (see Figure #1), capacities in Malaysia (MAA) and Thailand (TAA) will be relatively flat YoY in 2019, indicating potential further yield improvements as both markets continued to experience high demand with strong load factor of high-80%. MAA and TAA are the largest AOCs within the group, contributing bulk of the group’s profits.

Turnaround of AOCs. In 1Q19, PAA (Philippines) registered a strong turnaround (from heavy losses in 3Q-4Q18), while IAA (Indonesia) registered halved its loss. Management is confident on PAA and IAA profitability for the year. On the other hand, we anticipate AAI (India) to register lower loss in FY19, before potential turnaround in FY20, as AAI continue to expand its fleet surpassing 20 aircrafts to cater for international market.

Increase in jet fuel price. Our in-house analyst expects crude oil prices to trend slightly higher from current level of USD80/bbl, indicating an average of USD85/bbl in 2H19 (vs. average USD78.7 in 1H19). Jet fuel cost constitutes c. 40% of AAG operating cost structure. We are not overly concern on the increase in cost structure, as we expect AAG to improve its operating efficiency, while increasing its yield and ancillary income to offset the higher jet fuel cost.

Maintain BUY with unchanged SOP-derived TP: RM3.35 as we account for the attractive special dividend payout of 90sen/share. We remain positive on AAG’s outlook, given: 1) high load factors; and 2) improving yield and ancillary/other income.

MAHB (HOLD; TP: RM7.80)

Improving passenger mix. In 1H19, MAHB registered total pax growth of 4.7% YoY for Malaysia operation and 3.4% YoY for ISGA. However, Malaysia growth was mainly driven by domestic traffic (+8.2% YoY), which fetches lower margins due to lower tariff charges and spending nature (access to alcohol and tobacco products). We expect this trend to persist into 2H19 as domestic airlines (AirAsia, MAS and Malindo) continue to focus on domestic route expansion after consolidation in 2018. On a positive note, ISGA growth was driven by international traffic (+20.8% YoY), commanding higher tariff charges and the trend is expected to persist due to strong tourism demand banking on the severe devalued Turkish Lira currency.

RAB. The recent review on RAB framework (to be implemented in 2020) was well received by investors on the high 10.88% pre-tax WACC, at the high end on the previously guided 9-11%. We do not expect further positive surprise in coming review Oct 2018, while the finalization of tariff structure will be neutral to MAHB and allowable capex spend of RM5bn by MAVCOM is relatively in line with MAHB’s capex plan.

Maintain HOLD, TP: RM7.80. We maintain HOLD recommendation on MAHB with unchanged DCFE-derived TP of RM7.80. While RAB provides earnings certainty to MAHB, the framework will also put a cap on the potential earnings growth of its Malaysia operation. We believe further restructuring of RAB structure and allowable WACC in subsequent regulatory period will post future risk to MAHB.

Source: Hong Leong Investment Bank Research - 17 Jul 2019