Covid-19 has spread globally in fast pace, forcing governments in issuing travel bans and warnings while some airlines are facing solvency issues. The pandemic is affecting MAHB’s Malaysia operation as well as ISGA. We adjusted our traffic assumptions for Malaysia in 2020 to -1.3% YoY (from -0.6% YoY) and 2021 to +6.6% YoY (from +7.0% YoY) and ISGA in 2020 to -4.0% YoY (from +4.6% YoY) and 2021 to +9.3% YoY (from +6.4% YoY), resulting cut in earnings for FY20 (-32.3%) and FY21 (-15.7%). Maintain HOLD on MAHB with lower TP: RM5.75 (from RM6.75) based on 10% discount to a lower DCFE value: RM6.40.

Worsening Covid-19. Covid-19 has recently spread globally in fast pace, with no signs of containment (except for China). More countries have issued travel bans and warnings. Moreover, airlines have been reported having cash-flow issues with drastic cut in capacities and potentially face bankruptcy (eventually cease operations). Hence, we believe the negative impact on MAHB could be worse than initially thought to be. We have further cut assumptions for MAHB’s traffic forecast for FY20 to -1.3% YoY (from -0.6% YoY) and FY21 to +6.6% YoY (from +7.0% YoY).

ISGA to return to loss. Turkey’s Ministry of Health has issued a travel ban on 3 March, for foreigners who have visited China, South Korea, Iran, Iraq, and Italy within the last 14 days due to the ongoing Covid-19 outbreak. All passenger flights to and from these countries have also been cancelled. We expect MAHB’s 100% owned ISGA to be negatively impacted by the spread of Covid-19, given the high dependency on international traffic for Europe and Middle East sectors (see Figure #2). Potentially, ISGA will reverse back into red again after achieving EUR24.8m profit for the first time in 2019 (see Figure #3), driven by a jump of +20.4% YoY in international traffic. We have cut assumption for ISGA’s traffic forecast for FY20 to -4.0% YoY (from +4.6% YoY), but raised FY21 to +9.3% YoY (from +6.4% YoY) for a recovery.

Forecast. We have cut earnings for FY20 by 32.3% and FY21 by 15.7%, to reflect the lower passenger traffic, lower airport traffic and lower average non-aeronautical spending/passenger.

Maintain HOLD, TP: RM5.75. We maintain HOLD recommendation on MAHB with lower TP: RM5.75 (10% discount to DCFE value: RM6.40), from previous TP: RM6.75. MAHB (including ISGA) is expected to face weak passenger traffic at least in the near term due to Covid-19 on top of the current market concerns on the on-going regulatory development.

Source: Hong Leong Investment Bank Research - 10 Mar 2020