We are expecting airlines carriers including AirAsia to continue facing tougher operating conditions amidst the COVID-19 pandemic due to restricted movements and collapse in air travel despite the resumption of 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 negatively impacted passenger volume will see a rapid recovery soon after. We believe the recent sell-down presents an opportunity to buy into MAHB with renewed optimism in the yet to be signed Operating Agreement (OA). Faced with losses on collapse in passenger loads and cashflow challenges, AirAsia is in urgent need to raise capital. The sector could also be further de-rated by fears of longer-thanexpected recovery and remain mired with losses. We maintain Underperform on AirAsia with a TP of RM0.38 based on unchanged 0.5x FY21E BVPS. TP for MAHB (OUTPERFORM) is RM6.30 based on 22x FY21E EPS.

A weak 2QFY20 as expected, airports more resilient. For the recently reported 1QFY20 results, AirAsia came in below expectations but Malaysia Airports Holdings delivered 2QFY20 earnings which came in-line with our expectation. 2QFY20 revenue fell 70% in tandem with the contraction in passenger movements by 95%. Specifically, airport operations’ revenue declined by 73% due to lower revenue from the aeronautical (-91%) and non-aeronautical (-49%) segments due to the impact of COVID-19 pandemic and travel restriction imposed by Malaysia and other countries. Passenger traffic for the Malaysia operations contracted significantly by 95.7% (international: -97.7%, domestic: - 93.8%). The passenger traffic for Turkey operation contracted by 91.5% (international: - 100%, domestic: -86.0%). For 2QFY20, it recorded a loss of RM91m compared to RM20m in 1QFY20 due largely to widening losses at Turkey operation (RM151m compared to RM34m in 1QFY20). However, further losses were mitigated by lower total cost (-40% QoQ) and cushioned by the recognition of prior year tax recoverable. AirAsia was hit by a 98% decline in ASK. For 2QFY20, the number of passengers carried was down 98% YoY causing Group CASK (+>100%) to rise faster than RASK (+3%) due to realised fuel swap losses on the back of reduction in fuel consumption and drastic fall in oil prices. This brings 1HFY20 CNL to RM1,802m compared to a core net profit of RM29m in 1HFY19.

AirAsia’s 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. The group has also restructured a major portion of its fuel hedge with supportive counterparties and are still in process of restructuring the remaining exposure. Over the medium term, we expect AirAsia to face a tough operating environment already derailed by widespread travel disruptions due to the COVID-19, and hits from lower load factor. The group have applied for bank loans in their respective operating countries to shore up liquidity to help fund working capital and repayment of lease liabilities, which stand at RM12.2b as at 30 June 2020.

Potential re-rating if CA is signed by end Dec 2020. We highlight that on 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 OA with the Government following the extension of the concession (yet to be signed) will pave the way for the stock to be rerated. We believe the new OA will be investor-friendly, and create a sustainable long-term development of MAHB. MAHB has been 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 FY21 EPS.

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, the experience from SARS indicates that the negatively impacted 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 - 7 Oct 2020