Although availability of vaccines has renewed optimism for air travel returning to normal sooner than expected, we only expect air travel to recover at a gradual pace starting from 1Q 2022. In terms of profitability, we expect airlines including AirAsia to continue facing tougher operating conditions pending the widespread availability of vaccines as there could be sporadic resurgence of COVID-19 infections. For the sector, we prefer Malaysia Airport Holdings Berhad (MAHB), being the monopolistic airport operator in the country. The yet-to-be signed Operating Agreement (OA) could be a re-rating impetus for MAHB. Reiterate Outperform on MAHB. On the other hand, faced with losses on collapse in passenger loads, and cash flows challenges, AirAsia is in need to raise capital. Maintain Underperform on AirAsia. For stock picks, we like MAHB as a monopolistic airport operator in the country with the rising availability of vaccines renewing optimism for air travel to return to normal, albeit at a gradual pace.

QoQ, 1QFY21 losses narrowed. In their recently reported 1QFY21 results, both AirAsia and Malaysia Airports Holdings came in below expectations but with narrowing sequential losses. MAHB’s 1QFY21 revenue rose 28% in tandem with the 36% increase in airports operations contributed by higher aeronautical (+30%) and non-aeronautical (+41.5%) segments despite the contraction of passenger traffic. This higher revenue was partly due to RM181m in rebates in 4QFY20 as part of the assistance program to the tenants and airlines resulting in a low-base effect, and offset by temporary erosion of commercial rental under the New Rental Model (NRM) for 2021. Passenger traffic for the Malaysia and Turkey operations contracted by 19% and 11%, respectively. QoQ, 1QFY21 losses narrowed from RM685m in 4QFY20 to RM221m due to lower operating expenses (-25%) and absence of accelerated amortisation (RM100m) as cost containment strategy was continued in staff, maintenance and administrative costs. Similarly, AirAsia’s 1QFY21 losses narrowed QoQ from RM2,011m to RM628m due to higher revenue (+12%), coupled with lower CASK (-9%) and a higher RASK (+6%) as losses from the fuel hedge swap declined by 92% to RM30m.

AirAsia’s outlook. We view its recent fund raising, via new shares issue in order to shore up liquidity, positively as an interim measure to address its immediate cash flow requirements during this on-going pandemic. The private placement is part of its plans to raise between RM2.0b to RM2.5b in a combination of debt and equity funding to ensure sufficient liquidity for the Group.

The group has secured commitments from banks for government guarantee loan under the Danajamin Prihatin Guarantee Scheme and it is in its final stages of terms discussion and completion. In addition, AirAsia is in negotiations with its lessors to restructure the existing lease arrangements. AirAsia is navigating its recovery phase as key operational metrics improved in 1QFY21 group consolidated AOCs (Malaysia, Indonesia and Philippines) reported 10ppt decline in load factor to 67% on the back of sharply reduced capacity of 88% to merely 1.5m seats. This was also reflected in an 88% decline in ASK. For 1QFY21, the number of passengers carried was down 90% YoY.

The average load factor was at a reasonable 67%, with Malaysia hitting a load factor of 73% despite travel demand during the quarter softened by the lockdown and interstate travel restrictions imposed since January 2021. AirAsia Philippines leveraged a strong rebound in travel demand in 1QFY21 registering a passenger increase of 43% compared to 4Q 2020. A month-on-month breakdown showed that AirAsia Philippines grew its number of passengers by 57% despite only increasing 30% in operating capacity in March 2021 as compared to February 2021. AirAsia Thailand posted a 65% QoQ decline in passengers carried due to lower travel demand caused by the new wave of the Covid-19 pandemic in Thailand which began in the middle of December 2020.

Potential re-rating if CA is signed; a recovery play on renewed optimism for air travel. Recall 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 re-rated. We believe the new OA will be investor-friendly, and create a sustainable long-term development of MAHB which has been hit by COVID-19 in terms of passenger traffic growth both in Malaysia and Turkey.

Reiterate Neutral for sector. On picks, we like MAHB as a monopolistic airport operator in the country with the rising availability of vaccines renewing optimism for air travel to return to normal, albeit at a gradual pace. Furthermore, the yet to be signed Operating Agreement (OA) could be a re-rating catalyst for MAHB. Reiterate Outperform on MAHB and Underperform on Air Asia.

Source: Kenanga Research - 5 Jul 2021