We Expect Malaysia Air Travel Demand Growth at 4.5% YoY in 2020 Vs +6.1% YoY in 2019. The Sector Is Set to Benefit From the Various Initiatives by the Government for VMY 2020, Partially Offsetting the Deteriorating Consumer Sentiment. Nevertheless, the Sector Continued to be Dragged by the Uncertainty of OA/RAB/AREIT Implementation. We Maintain NEUTRAL on the Aviation Sector, With HOLD Recommendations on MAHB (TP: RM7.80) and AirAsia (TP: RM1.62).

Commendable air travel demand growth. For 2019, MAHB registered pax movement growth of +6.1% YoY, mainly driven by domestic segment +9.5% YoY while ASEAN and non-ASEAN registered +3.8% YoY and +2.3% YoY respectively. We note that domestic-based airlines have been adjusting capacities towards the domestic segment due to: (i) weakening consumer sentiment and (ii) competitive international segments. Henceforth, domestic segments generated lower ancillary income to airlines (AAG, MAS and Malindo) as well as lower airport charges and commercial revenue to MAHB. We expect pax growth of +4.5% YoY for 2020 (from +3.5% YoY).

VMY 2020. The government has declared 2020 as Visit Malaysia Year, which is expected to increase tourist arrivals into Malaysia as well as domestic travelling. Based on VMY 2007 and VMY 2014, visitor growths were 19.5% YoY and 6.7% YoY respectively while MAHB’s international passenger movement growths were 10.5% YoY and 4.9% YoY respectively. Malaysia government has allocated RM1.1bn under Budget 2020 for VMY 2020 (vs. RM1.2bn for VMY 2014). We believe the aviation sector will benefit from the planned initiatives for VMY 2020, partially addressing the concerns on deteriorating Malaysia and regional sentiments.

Uncertainty of OA/RAB/AREIT. Details of the new Operating Agreement (OA) and RAB are still being finalized between MAHB with MOT, MOF and MAVCOM (to be merged with CAAM). However, recent Minister of Transportation’s comments on preference towards alternatives of RAB structure and public private partnerships for Malaysia’s airports development as well as cabinet approval of the integration of CAAM and MAVCOM (unwind), has heightened the uncertainties of RAB implementation. Furthermore, the implemented departure levy, on-going restructuring of MAS and VMY 2020 are seen as an impending block to RAB implementation.

Fuel price. Jet fuel price has been trading at average USD78/bbl in 2019, in tandem with Brent oil trading at USD64/bbl. Despite the recent intense Middle East situation, we expect oil price to average at USD60/bbl in 2020 due to current inventory built up globally, and hence jet fuel to trade at USD70-75/bbl. AirAsia has hedged 73% of its 2020 fuel requirements at Brent oil USD60.22/bbl and 19% of 2021 at USD59.45/bbl.

Maintain NEUTRAL. Maintain NEUTRAL given the moderating domestic consumer sentiments and current uncertainty of government policy. Maintain HOLD recommendations on MAHB (TP: RM7.80) and AirAsia (TP: RM1.62).

MAHB. Maintain HOLD recommendation on MAHB with unchanged DCFE-derived TP of RM7.80. There are still uncertainties with RAB framework as well as its implementation. Furthermore, the proposed RAB and PSC may also affect the impending MAS restructuring exercise and success of VMY 2020 campaign.

AirAsia. Maintain HOLD recommendation on AAG with unchanged TP of RM1.62, based on 20% discount to SOP of RM2.02. We remain positive on AAG’s strategic growth in leveraging into digitalization to enhance the group’s earnings. However, the group face immediate risks of market slowdown, competition as well as regulations.

Source: Hong Leong Investment Bank Research - 15 Jan 2020