Reiterate OVERWEIGHT on the sector, as we remain positive on the future development of the sector due to a more active involvement from the Transport Minister. Over the next six months, AIRASIA (OP; TP: RM3.25) is expected benefit from the decline in fuel cost where jet fuel is down by 30% from its peak of USD99.1/bbl, coupled with more disposals of non-core investments in the cards, of which investors could benefit from potential special dividends. We think that AIRPORT (OP; TP: RM8.95) is worth a close watch as the potential implementation of RAB framework in 2019 could be a re-rating catalyst for the stock as they would be able to raise PSC charges based on capex requirement.

4QCY18 share price performance. Over 3QCY18, share price for both AIRASIA and AIRPORT declined by 10% and 12%, respectively. We believe that the decline in AIRASIA’s share price is partly attributed to its special dividend of 40.0 sen that went ex on 12th Dec 2018. The decline in AIRPORT’s share price could be due to the uncertainties arising from the announcement of an airport REIT by the government in Budget-2019, which could further add complexity to the implementation of RAB model as mooted by MAVCOM.

Mixed bag of results in 3QCY18, AIRASIA came in broadly within while AIRPORT came in above expectations; an improvement compared to 2QCY18, as both stocks were in line. The better-than-expected performance from AIRPORT was due to lowerthan-expected operating cost, depreciation and tax. We kept our FY18-19E core earnings for AIRASIA unchanged but raised AIRPORT’s by 13-8%.

AIRPORT’s traffic, on track to meet expectations. AIRPORT’s 11M18 passengers (including ISG) registered growth of 4.1% (+2.4% for Malaysian operations and +9.3% for Turkey operations) YoY-YTD, on track to meet our recently revised target of 4.7%. To recap, we previously projected full-year growth of 8.5% as we were expecting stronger growth from both domestic and international traffic, especially from China, which was no longer achievable as it was affected by a string of events in the region.

Industry updates. Previously, we highlighted that AIRPORT is racing against time to raise their service quality to avoid financial penalty from MAVCOM, and we believe that these efforts are still on-going. In recent months, key events that are of interests are: (i) a potential airport REIT and proposal of departure levy for international passengers in Budget-19, and (ii) the intensifying public spat between AIRASIA and AIRPORT.

The proposal of an airport REIT and departure levy is creating uncertainties as the move of setting up an airport REIT is creating confusion amongst investors, particularly as details on the proposed structure is lacking. While we are not against the proposal of departure levy, we believe that the proposed rate of RM40 and RM20 for international and ASEAN passengers, respectively, should go through a study by MAVCOM, being the government-driven regulator which was created to promote a level playing field for all of its stakeholders. Hence, we believe that an unexpected move on the potential implementation of departure levy could further undermine MAVCOM’s roll in ensuring competency, integrity, accountability, and transparency.

That aside, we also believe that the escalating public spat between AIRASIA and AIRPORT does not bode well for the future development of the sector, which creates unnecessary worries amongst the public and investors with regards to the PSC charges. To recap, AIRPORT served a writ of summons to AIRASIA and AAX for RM9.4m/RM26.7m in PSC that they had not and refused to collect from traveling passengers, arising from the equalisation of PSC charges in KLIA2 from RM50 to RM73 for international passengers, of which AIRASIA and AAX have been responding to AIRPORT’s claims through the media platform as per our observation. We strongly believe that any differences and dispute between stakeholders should be handled professionally and through legal means. In our view, the equalisation of PSC charges is essential to promote a level playing field in the industry and it is unlikely to impact inbound international traffic volume given that Malaysia has one of the lowest PSC charges in the region for International flights, and most importantly it bodes well with government’s direction in promoting domestic tourism.

Yesterday, AIRPORT’s announced that the disposal of its 11% equity stake in GMR Hyderabad International Airport (GHIAL) to GMR Airports Limited (GMR Airports) for a cash consideration of USD76.1m have been aborted due to GMR Airports’ inability to meet their obligation in accordance with the terms of the SPA by 31 December 2018. We are neutral on the termination of the disposal, as we did not factor in the potential one-off gain of c.RM300.0m into our FY18E NP, as the timeline for the completion of the deal was unusually long, especially when GMR Airports are the major shareholder of GHIAL with an equity stake of 63%. To recap, AIRPORT invested RM40.2m in GHIAL’s 11% equity stake back in 2002, and it has always been part of their plan to divest in order to unlock the value of their investment. Hence, we believe that AIRPORT and GMR Airports to continue their talk on this particular deal even after the termination, as the termination is due to timing issue.

Maintain OVERWEIGHT. To recap, we upgraded the sector from NEUTRAL to OVERWEIGHT due to the upgrade in AIRPORT from MP to OP with a higher TP of RM8.95 in our recent 3QCY18 results review. We call OVERWEIGHT on the sector amid all the less encouraging news flow mention above as we believe that it is “business as usual” for both AIRASIA and AIRPORT for now, as we expect their FY18 performances to be in line with our estimates. For near-to-medium term, AIRASIA (OP; TP: RM3.25) would benefit from the decrease in fuel cost whereby jet fuel is down by 30% from its peak of USD99.1/bbl, coupled with more disposals of non-core investments in the cards, of which investors could benefit from potential special dividends. To recap, AIRASIA announced the sale of 25 aircraft to Castlelake for USD768.0m recently, which is the second aircraft deal after they sold 84 aircrafts to BBAM. We think that AIRPORT (OP; TP: RM8.95) is worth a close watch as the potential implementation of RAB framework in 2019 could be a re-rating catalyst for the stock as they would be able to raise PSC charges based on capex requirement. We believe that aviation would be an exciting sector to follow in 2019 as we get more clarity on the government’s direction on the development of the sector. We are positive that the government would come up an amicable solution for all the stakeholders given our Transport Minister’s active participation in reshaping the sector.

Source: Kenanga Research - 3 Jan 2019