We are expecting airlines carriers including AirAsia to face tougher operating conditions following the COVID-19 pandemic due to the restrictions and collapse in air travel despite having resumed its scheduled domestic flights. For the sector, we prefer Malaysia Airport Holdings Berhad (MAHB), being a monopolistic airport operator in the country. While a prolonged coronavirus pandemic could impact MAHB’s earnings, the experience from SARS indicates that the impact to passenger volume will see a rapid recovery soon after. We believe the recent sell-down presents an opportunity to buy into MAHB and with renewed optimism in the yet to be signed OA. AirAsia is expected to face losses on weaker loads and higher operating costs. In the meantime, the sector could be further de-rated by fears of longer-than-expected recovery and remain mired with losses. We maintain Underperform on AirAsia with a TP of RM0.52 based on unchanged 0.5x FY21E BVPS. TP for MAHB (OUTPERFORM) is RM6.30 based on 22x FY21E EPS.

A weak 1QFY20 as expected. The recently reported 1QFY20 results saw Airport and AirAsia coming in below expectations. Malaysia Airports Holdings delivered 1QFY20 earnings which came in below expectations due to lower-than-expected contribution from retail and higher-than-expected losses in Turkey. 1QFY20 revenue fell 25% in tandem with the contraction in passenger movements of 23.9% due to the impact of pandemic. Revenue from the aeronautical segment decreased by 22% due to lower passenger movement. Passenger traffic for the Malaysia operations contracted 28% (international: - 32.8%, domestic: -22.0%). The passenger traffic for Turkey operations contracted by 12.3% (international: -6.7%, domestic: -15.7%). Non-aeronautical segment revenue decreased 28.6% due to lower retail (-41%) and rent & loyalties (-21%). AirAsia was hit by lower load factor and Group CASK (+38) rose faster than RASK (+2%) on improved pricing strategy in Malaysia and Indonesia.

AirAsia domestic flights resumed operations. AirAsia has resumed its scheduled domestic flights commencing with Malaysia on 29 April 2020, followed by Thailand (1 May 2020), the Philippines (1 June 2020) and India (4 May 2020). The resumption of services will initially be focused on key selected domestic routes, which will increase gradually to include international destinations around the network, once the situation improves and governments lift borders and travel restrictions. We highlight that AirAsia’s website is experiencing traffic growth of 170%. Some of the most popular routes booked include Kota Kinabalu and Kuching to Kuala Lumpur for Malaysia, Bangkok to Chiang Mai and Hat Yai for Thailand, Manila to Puerto Princesa and Davao for the Philippines, Delhi to Srinagar and Bengaluru to Hyderabad for India and Jakarta to Denpasar and Medan for Indonesia. However, over the medium term, we expect AirAsia to face tough operating environment of low loads derailed by widespread travel disruptions due to the COVID-19. The group has also restructured a major portion of the fuel hedges with supportive counterparties and are still in process of restructuring the remaining exposure. The group have applied for bank loans in their respective operating countries to shore up liquidity, with net cash currently at RM1.0b as at 31 March 2020. In addition, AirAsia has ongoing deliberations with a number of parties for joint-ventures and collaborations that may result in additional third-party investments in specific segments of the group's business.

Potential re-rating if CA is signed in end Dec 2020. We highlight that following 12 Apr 2019, MAHB announced that the Government had approved the extension of MAHB’s concession to operate 39 airports in Malaysia from 2034 to 2069. The new Operating Agreement (OA) with the Government following the extension of the concession (yet to be signed) will pave the way for the stock to be re-rated. We believe the new OA will be investor-friendly, and create a sustainable long-term development of MAHB. We expect MAHB to be hit by COVID-19 in terms of passenger traffic growth both in Malaysia and Turkey. Management has highlighted that MAHB insisted on a 90-day credit period for rental of premises instead of rebates at the airport as well as landing and parking charges. While a prolonged pandemic would impact MAHB’s earnings, the experience from SARS suggest that passenger volume will see a rapid recovery once the pandemic subsides. With renewed optimism in the yet to be signed OA, we raise out TP from RM5.40 to RM6.30 based higher PER multiple from 19x to 22x based on FY21EPS.

Reiterate Neutral. On picks, we like MAHB as a monopolistic airport operator in the country. While a prolonged coronavirus pandemic could impact MAHB’s earnings, judging by the experience from SARS indicates that the impact to passenger volume should see a rapid recovery soon after. TP for MAHB is RM6.30 based on 22x FY21E EPS. Reiterate Outperform on Malaysia Airport. We believe the recent sell-down presents an opportunity to buy this high beta stock.

Source: Kenanga Research - 10 Jul 2020