We reiterate our NEUTRAL view on the sector. There was a sequential deterioration in the recently concluded 2QCY22 results season (against expectations). Both aviation stocks under our coverage, i.e. AIRPORT and CAPITALA disappointed as the rebound in air travel fell short of expectations. While we expect passenger throughput to continue to improve from 2HCY22, we only expect the number to match that of pre-pandemic by 2024. Meanwhile, each player also has its own unique set of problems. For AIRPORT, a much-needed tariff hike does not appear to be forth-coming in accordance with a recent consultation paper published by Malaysia Aviation Commission (MAVCOM). Meanwhile, the clock is ticking on a more viable and holistic regularisation plan to lift CAPITALA out of its Practice Note 17 (PN17) status. We do not have any pick for the sector.

Air travel recovery fell short of expectations. There was a sequential deterioration in the recently concluded 2QCY22 results (against expectations) as both aviation stocks under our coverage missed our forecasts vs. one within and one below in 1QCY22 (see table on Page 2). Air travel rebounded in 2QCY22 on the reopening of the economy and international borders but fell short of expectations. While tripling YoY to 34m, AIRPORT’s total passenger throughput in 1HFY22 only accounted for 37% of our full-year forecast (and 51% of 67m recorded in 1HFY19 prior to the pandemic). Likewise, while surging 4x, CAPITALA’s 1HFY22 revenue passenger km (RPK) only made up 35% of our full-year forecast (and 27% of 31b recorded in 1HFY19 pre-pandemic).

Outlook. We expect further improvement in AIRPORT’s passenger throughput in 2H 2022. Already, the total passenger traffic of its entire network of airports continued to gain traction in July 2022, recording 7.8m, bringing 7M YTD number to 42m (+175%). We expect the traffic trajectory to grow exponentially from low base in subsequent months driven by domestic seat capacity nearing 90% of pre-Covid level from July and international seat capacity is expected to recover to at least 50% of pre-Covid level during the same period. AirAsia and Scoot Airlines are the first international airlines to resume services to Kota Kinabalu International Airport on 16th and 29th April, respectively, after a two-year lull. Among the airlines that have resumed services are Thai AirAsia, AirAsia X, Vietjet Air and AirAsia covering Bangkok, Incheon, Hanoi and Hat Yai. Royal Brunei Airlines has resumed services to Kota Kinabalu from Bandar Seri Begawan, utilising Airbus 320neo with two-time weekly frequencies. Nonetheless, post 2QCY22 results, we cut our FY22F passenger throughput assumption by 13% to 70m (and reduced our FY23F assumption by 13% to 101m).

Similarly, we share CAPITALA’s optimism that its passenger demand will continue to rise in 2HCY22, judging from the encouraging load factors recorded at 159 international routes re-launched in this period. In August, AirAsia operated 108 aircrafts and will operate 160 by end of the year. Nonetheless, similarly, post 2QCY22 results, we cut our FY22F RPK assumption by 15% to 23b (and reduced our FY23F assumption by 14% to 50b).

Company-specific issues not helping either. Meanwhile, each player has its own unique set of problems. For AIRPORT, a much-needed tariff hike does not appear to be forth-coming in accordance with a recent consultation paper published by MAVCOM which does not augur well for its ability to generate enough cash flow for capex purposes, particularly for airport expansion and maintenance. While MAVCOM also proposes a mechanism for AIRPORT to recoup during the later years the losses incurred during the initial years, we are concerned over AIRPORT’s cash flow over the immediate term. Meanwhile, for CAPITALA, the clock is ticking on a more viable and holistic regularisation plan to lift it out of the PN17 status. It will have until January 2023 to do so. We do not have any pick for the sector.

Source: Kenanga Research - 7 Sept 2022