The recent worsening Covid-19 in Malaysia as well as on-going spread worldwide are affecting air travel demand, while Malaysia government ha s been trying to contain the virus outbreak by implementing TEMCO, quarantining people, issuing travel advisories and restricting border movements. MAHB will be affected by the weakened passenger traffic in terms of passenger tariff income, aircraft landing & parking charges and lower retail income. We have cut our forecasts for FY20-22 to -RM548.9m, -RM158.0m and +RM484.9m (from -RM386.6m, +RM279.2m and +RM675.0m). Maintain SELL on MAHB with lower TP: RM4.15 (from RM4.35) based on DCFE.

Worsening domestic Covid-19. The recent increasing domestic new cases of Covid- 19, has raised the nation’s alert, prompting the government to implement lockdowns (TEMCO) in hotspots as well as quarantine measures. This resurgence has raised concerns on the safety and convenience of travelling. MOH has advised the general public to stay at home and avoid unnecessary traveling in bid to control the outbreak of the pandemic. These events are likely to affect domestic air travel demand especially for Sabah and Kedah states. Based on MAHB’s 2019 statistics, airports in Sabah and Kedah registered 10.1m and 0.9m of domestic passenger movements respectively (combined 21.2% of total MAHB’s domestic movement).

Restricted international travel. Many countries including Malaysia are still implementing border closing policy, not allowing free movement for international travel (unless with government’s approval). The government has further tightened its policy by imposing entry ban from countries with over 150,000 cases, which include Indonesia, Philippines, India and Bangladesh (combined registered 13.5m passenger movement or 30.0% to KLIA-KLIA2’s international traffic in 2019). The much anticipated bubble travel concept is unlikely to be realised anytime soon, as Malaysia government (as well as many other countries) seems to remain highly cautious of the spread of Covid-19 in the country, while counterpart countries may view Malaysia as an increasing risk country. With the prolonging restriction on international travel, MAHB runs the risks of continued loss-making, unless a vaccine is found and rolled out to the mass public.

Turkey operation. While Turkey has re-opened its border and allowed for tourism travel since June, there are still several restrictive measures being put in place for tourists and other countries may restrict their citizens from travelling into Turkey given the country’s high number of Covid-19 cases (>320,000). Similar to Malaysia operation, MAHB’s wholly owned ISGA is expected to remain loss-making, until the wide availability of vaccine.

OA finalization. On the positive side, MAHB is expecting to finalize the Operating Agreement (OA) by year end. The OA will ensure long term sustainable airport development with suitable capital funding model while ensuring sustainable earnings and returns to MAHB. We believe the RAB is likely to be put on hold for now, as it is deem unsuitable under the current environment.

Forecast. We have cut our passenger movement assumptions for FY20-22 to -68.1%, +76.6% and +48.8% (from -47.9%, +63.2% and +19.7%). We now expect losses for FY20 at -RM548.9m (from –RM386.6m) and FY21 at -RM158.0m (from +RM279.2m) and only expect a turnaround in FY22 at +RM484.9m (from +RM675.0m), following recent events and expected sluggish recovery of air passenger travel into FY21.

Maintain SELL, TP: RM4.15. We reiterate SELL recommendation on MAHB with lower TP: RM4.15 (from previous TP: RM4.35) based on DCFE. Due to the on-going Covid-19 outbreak, MAHB is expected to remain in the red into FY21 with depleting cash flow. Nevertheless, management has secured enough liquidity until 2021-2022.

Source: Hong Leong Investment Bank Research - 5 Oct 2020