We now expect a lower-than-expected passenger movement due to carriers grinding to a halt caused by travel restrictions both locally as well as globally. We highlight that management is not ruling out RAB and discussion with the relevant authorities is still on-going. All in, we cut our passenger growth assumption in FY20 from 4% to -12%. TP is cut from RM7.20 to RM5.70 based on 19x FY21E EPS from previously 22x to reflect the de-rating of the market on the back of a bleaker economic outlook, both globally and for Malaysia. Reiterate Outperform.

Most carriers are grounded due to global travel restrictions. We are expecting lower passenger growth ahead following the COVID-19 pandemic which is taking its toll on airlines operators due to the travel restrictions and collapse in air travel. Case in point, AirAsia will temporarily suspend all international and domestic flights in Malaysia from Mar 29 to April 25, while AirAsia Philippines will be suspended from Marc 20 to April 14. Additionally, AirAsia Indonesia will see a sharp reduction in frequency in its international flights. Similarly, AirAsia Thailand will halt its international flights from March 22 to April 25. Both airlines will operate on domestic flights at reduced frequency. Malaysia Airlines is expected to significantly reduce its overall network during the Movement Control Order (MCO). This could be further exacerbated by the recently extended MCO (extended to April 14 from March 31) and it has suspended flights including those to India and the Philippines on top of previously suspended services to Saudi Arabia, South Korea, as well as Beijing Daxing. Case in point, for MAHB, its YoY Feb 2020 passenger movements for international fell (-30%) and domestic declined (-17%). This brings YTD Feb 2020 passenger movements for international (-12%) and domestic (-4%) passenger, respectively.

Outlook. We expect MAHB to be hit by the COVID-19 in terms of passenger traffic growth and potential tariff rebates or discounts on its retail rentals. Management highlighted that MAHB is still talking to the Government in terms of mechanism on the recently announced rebates on rental for premises at the airport as well as landing and parking charges. We highlight that management is not ruling out RAB and discussion with the relevant authorities is still on-going. For illustration purposes, assuming a 20% rebate on both rental and landing & parking charges over a 6-month period, a back-of the envelope calculation suggest a negative impact of 20% of our FY20E net profit.

Downgrade FY20E/FY21E net profit by 43%/19%. All in, we cut our passenger growth assumption in FY20 from to 4% to -12%. As such, the low base effect means our FY21E passenger movement forecast, is now +10%.

Re-iterate OP. Correspondingly, our TP is cut from RM7.20 to RM5.70 based on 19x FY21E EPS (-1.0SD below historical forward mean) from previously 22x to reflect the de-rating of the market on the back of a bleaker economic outlook, both globally and for Malaysia. We roll over our valuation from FY20E to FY21E. We believe the recent sell-down presents an opportunity to buy this high beta stock.

Risks to our call include: (i) prolonged Coid-19 disruption beyond mid-year resulting in lower-than-expected passenger volume, and (ii) weaker-than-expected WACC from the RAB.

Source: Kenanga Research - 30 Mar 2020