1QFY20 core PATMI at RM28.4m (-63.5% QoQ; -80.9% YoY) was below HLIB’s expectation (8.3%) and consensus (17.5%), affected by Covid-19. The aviation sector has virtually ceased since April and only expected to gradually pick up as airlines restate flights from June/July onwards. Hence, we expect worsening results in upcoming 2QFY20 before returning to breakeven levels in 2HFY20. Management has been cutting costs and delaying capex as well as securing credit lines for the year. We downgrade MAHB to SELL (from Hold) with lowered DCFE derived TP: RM4.35 (from RM5.75) after adjusting FY20 to loss and lower FY21 earnings, as we expect aviation market to remain subdued.

Below expectation. MAHB recorded core PATMI of RM28.4m (-63.5% QoQ; -80.9% YoY) for 1QFY20, vs. HLIB’s full year forecast of RM341.0m (8.3%) and consensus of RM162.0m (17.5%). We deem the result below expectation as we expect major loss making in subsequent 2QFY20 and only breakeven levels in 2HFY20. In 1QFY20, we have excluded EIs of -RM89m doubtful debt provision and RM16.7m forex gain on investment in Hyderabad airport.

Dividend. None.

QoQ & YoY. Core PATMI dropped 63.5% QoQ and 80.9% YoY, mainly due to the drop in passenger traffic in MAHB (-32.2% QoQ; -27.5% YoY) and ISGA (-19.1% QoQ; -12.5% YoY) affected by Covid-19 and implementation of Movement Control Order (MCO) during the quarter.

Covid-19. The outbreak of Covid-19 has severally affected global travel, impacting the overall aviation sector, including both MAHB and ISGA. April traffic dropped 99% to almost nil while May and June are likely to remain subdued. Management shared that most airlines are currently operating at minimal level for domestic routes and will only pick up services (including international routes) gradually from June/July onwards. However, the situation remains very fluid. We anticipate traffic to only start normalise when a vaccine for Covid-19 is found, possibly early-2021.

Measures. Management revealed several measures in reducing costs (targeting 20% cut vs. 2019), deferring capex spending and improving cash positions by engaging government for dated receivables (for SIC, MARCS, ITA, etc), securing contingency bank line of RM1.7bn and divesting stake in Hyderabad airport (valued at RM440- 520m). We take note that management put utmost importance in securing liquidity for the group to ride through the Covid-19 impact for the year as the group has maturing debt of RM1.0bn (August) for MAHB and RM210m (June and December) for ISGA.

RAB/OA. The on-going issues of Covid-19, political uncertainty, merger of CAAM and MAVCOM, MAS restructuring and survivability of the airline industry, are expected to continue to affect RAB’s implementation while the OA terms will not be firmed yet within the near term. Nevertheless, management indicated that they are progressing well in the engagement with government with positive feedbacks.

Forecast. We have cut our forecasts for FY20 to loss -RM465.1m (from profit RM341.0m); and FY21 to profit RM173.2m (from RM521m). We expect industry to only normalise in FY22 with forecasted profit RM552m.

Downgrade to SELL, TP: RM4.35. We downgrade to SELL recommendation (from Hold) on MAHB with lower TP: RM4.35 (from RM5.75) based on DCFE, post earnings adjustments. MAHB 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 - 27 May 2020