Although availability of vaccines has renewed optimism for air travel returning to normal sooner than expected, economy re-opening are facing doubts with the global infection curve on the rise again as Omicron has become the main coronavirus strain. Nevertheless, we project air travel to recover albeit at a gradual pace starting from 2Q 2022. 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 which we reiterate as an Outperform. Although ramp-up of vaccinations in South East Asia have lifted hopes for domestic travel recovery, international travel is likely to remain very modest, with the global infection curve on the rise again over, the next 3-6 months. Hence, we maintain Underperform on AirAsia. For stock picks, we like MAHB (OP; TP: RM7.00) being a monopolistic airport operator in the country and premised on gradual air travel recovery. Maintain Underperform on AirAsia (TP: RM0.70).

Mixed bag for 9MFY21. In their recently reported 9MFY21 results, Malaysia Airports Holdings came in within expectations but AirAsia came in below. MAHB’s 9MFY21 revenue fell 30% in tandem with lower aeronautical (-32%) and non-aeronautical (-36%) segments. Passenger traffic for the Malaysia operation contracted by 83% due to lower international (-91%) and domestic (-78%) to 4m passengers. However, Turkey operation showed signs towards normalisation as passenger traffic rose 43% (international: +43%, domestic: +42%) to 17.9m. 9MFY21 losses widened to RM630m compared to RM431m in 9MFY20 due to wider losses in Malaysia operation. However, AirAsia’s 9MFY21 losses narrowed due to absence of fuel hedge swap losses.

AirAsia’s outlook. Although ramp-up of vaccinations in South East Asia lifts hopes for domestic travel recoveries, international travel is likely to remain very modest, with the global infection curve on the rise again as Omicron has become the main coronavirus strain, over the next 3-6 months. The group have successfully completed its renounceable rights issue raising RM974.5m and providing strong cash injection to support the overall Group. The latest fund raising is in addition to: (i) two tranches of private placement, raising RM336m, and (ii) Danajamin’s 80% guaranteed loan of up to RM500m. BigPay has also recently secured investment up to USD100m from a large conglomerate in South Korea, SK Group. They have also completed two batches of renegotiation of lease terms with lessors which will see a lower lease rental per aircraft in the future, and had expected to complete the renegotiations with all lessors by end of 2021. 3QFY21 group consolidated AOCs (Malaysia, Indonesia and Philippines) reported a 1ppt increase in load factor to 67% on the back of sharply lower number of passengers (-82%). AirAsia Philippines stood out, which demonstrated a strong performance in 3Q 2021, posting growth in the number of passengers (+167% YoY and + 5% QoQ) and a load factor at 77%. With the recent positive news announcing the uplifted travel ban for senior citizens and minors commencing last week, AirAsia Philippines is confident of a strong path to recovery, driven by strong pent-up demand for leisure travel and to reconnect with relatives. AirAsia Malaysia operated at 10% of capacity and carried 9% of passengers in 3QFY21 compared to 3QFY20, due to strict travel restrictions in place. Nonetheless, a M-o-M comparison in September indicated that AirAsia Malaysia more than doubled the number of passengers carried driven by the opening of the Langkawi travel bubble which commenced from 16 September. Due to the temporary hibernation of the fleet in support of the containment efforts by the government, AirAsia Indonesia carried 21% of passengers with 26% of capacity operated YoY. Since mid-October, AirAsia Indonesia has gradually started resuming flights in line with demand, commencing with the Jakarta-Bali route. AirAsia Thailand carried 4% of passengers on 5% of capacity compared to 3QFY20. With the upcoming year-end peak holiday season and reopening of the Phuket Sandbox to international travellers, AirAsia Thailand remains confident of a strong recovery in demand in 4Q 2021. YoY, 3QFY21 Teleport revenue grew 180% despite chalking EBITDA losses (RM12m) compared to a 3QFY20 positive EBITDA (RM20m) as it sacrificed margins to significantly scale up in certain routes on chartered cargo flights to gain market share and to achieve a consistent and reliable cargo network while the passenger network operated by AirAsia airlines saw minimal operations. Nonetheless, Teleport had narrowed its losses by 24% QoQ. AirAsia super app’s EBITDA losses widened to RM76m in 3QFY21 from RM46m in 2QFY21 as it ramped up its offerings through expansion and investment in technology.

Potential re-rating for MAHB 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 path for MAHB which has been hit by COVID-19 in terms of passenger traffic growth both in Malaysia and Turkey. Our preferred pick is MAHB with a TP of RM7.00 based on 23x FY22 EPS (-0.5 SD below 5-year pre-pandemic historical forward mean).

Source: Kenanga Research - 4 Jan 2022