• MAHB reported a steeper core net loss of RM313m (from RM91m loss in 2Q20) due to higher depreciation, finance expenses and lower tax credit. 9M20 core net loss of RM455m was below consensus and our expectations.
• Given the good progress in Covid-19 vaccine development, the recovery in passenger movements may be stronger and sooner than our earlier expectations. We now expect the recovery to start in early-2H2021.
• Upgrade to HOLD with a higher PT of RM5.45. While MAHB’s near-term earnings are still weak, we expect investors to start focusing on its longerterm profitability. At 19x 2022E PER, MAHB’s valuation looks fair to us.

Steep 3Q20 core net loss of RM313m

Sequentially, MAHB’s 3Q20 revenue rebounded by 46% qoq to RM397m, driven by strong revenue recovery in its Turkey operation (+246% qoq to RM121m) and modest pick-up in Malaysia revenue (+16% qoq to RM276m). After opening its border in June 2020, Turkey has seen a steady increase in passenger movements. On the other hand, Malaysia’s border has remained closed since March 2020, thereby hampering the recovery in passenger movements. Notwithstanding the higher revenue, MAHB reported steeper core net loss of RM313m (from RM91m core net loss in 2Q20) due to higher depreciation, interest costs and lower tax credit.

9M20 results was below market and our expectations

Cumulatively, MAHB’s 9M20 core net loss of RM443m was steeper than market and our expectations. The market was expecting a full-year net loss of RM455m while we were forecasting a full-year core net loss of RM449m. The steeper-than-expected losses were due to the sharp and prolonged decline in the passenger traffic, lower retail rental income and higher-than-expected depreciation & amortisation costs.

Good progress in cost containment and cash conservation initiatives

MAHB continue to focus on its cost containment and cash conservation / recovery initiatives: (i) year-to-date total cost savings of 31.5%, including 20% reduction in core operating cost (staff costs, maintenance, utilities); (ii) prudent cash management with only RM52.9m of cash outlay in 9M20; (iii) MAHB has recovered RM332.7m of government-related receivables in year-to-date 2020; (iv) management has secured RM1.4bn of revolving credit facilities (RM300m has been drawn down); and (v) MAHB has successfully issued RM700m of Sukuk in November 2020. Overall, management does not see the need for a cash call within the next 12 months.

Cutting 2020-21E earnings forecasts due to CMCO, higher depreciation

We are cutting our FY20-21E earnings forecasts, now expecting MAHB to report larger core net loss of RM644m in 2020E (from the prior forecast of RM449m net loss) and a core net loss of RM38m in FY21E (from core net profit of RM126m). We have incorporated: (i) lower passenger movements for 2020 and 1Q21 due to the prolonged border closures, reimplementation of CMCO and rising Covid-19 cases in Malaysia; (ii) lower retail rental income due to rental rebate offered to its tenants; and (iii) higher depreciation and amortisation costs. Management has guided for RM100m of accelerated depreciation in 4Q20 in relation to its old assets.

Raising 2022E and long-term traffic assumptions on Covid-19 vaccine hope

On the other hand, we are turning more positive on MAHB’s 2H21 and 2022 earnings outlook. In view of the good progress in the development of Covid-19 vaccines, the recovery in passenger movements should be stronger and sooner than our prior expectations. We have therefore upgraded our 2022E and long-term passenger movement forecasts, resulting to a 7% upgrade in MAHB’s 2022E earnings forecasts. We are lifting our SOTP-derived price target to RM5.45 (from RM4.20). The upgrade in price target reflects the changes in our long-term passenger movement growth forecasts and lower WACC of 7.7% (from 8.0%) due to the improved visibility for a recovery in the aviation sector.

Upgrade to HOLD

We upgrade MAHB to HOLD (from SELL). While we expect its near-term earnings to stay weak, we believe the investors will start pricing in a recovery in the aviation sector following the good progress on Covid-19 vaccine developments. Investor may focus on MAHB’s long-term profitability (2022-23E), instead of zooming into the 2021E earnings. At 19x 2022E PER, MAHB’s valuation looks fair to us. Key upside risks are stronger-than-expected recovery in revenue, higher-than-expected cost savings and better-than-expected terms under the new operating agreement; downside risk include negative news on Covid-19 vaccine developments and steeper-than-expected quarterly losses.

Source: Affin Hwang Research - 1 Dec 2020