We reiterate our NEUTRAL view on the sector. We project tourist arrivals in Malaysia to jump four-fold to 9.6m in 2023 on the back of the reopening of international borders which will underpin growth in the passenger throughput of AIRPORT (MP; TP: RM6.10) and the passenger demand of CAPITALA (MP; TP: RM0.60). We project AIRPORT’s system-wide passenger throughput to rise 29% and 15% to 101m and 116m in 2023 and 2024, respectively, but it’s still a long way from matching the pre-pandemic level of 141m recorded in 2019. Similarly, we project CAPITALA’s system-wide revenue seat km (RPK) to grow 52% to 35b in 2023, but still falls short of the pre-pandemic level of 63b in 2019. Meanwhile, AIRPORT’s much-needed tariff hike does not appear to be forth-coming, while a regularisation plan is underway to lift CAPITALA out of its Practice Note 17 (PN17) status. We do not have any pick for the sector.

Tourist arrivals to rise four-fold to 9.6m in 2023. We project tourist arrivals in Malaysia to jump four-fold to 9.6m in 2023 from an estimated 2.5m a year ago (see chart on the next page) thanks to: (i) the return of both business and leisure air travel globally as the pandemic comes to an end, (ii) the revocation of all on-arrival quarantine and testing requirements in Malaysia from 1 Aug 2022, and (iii) the eventual gradual reopening of China which historically contributed to an estimated 12% of total tourist arrivals in Malaysia. This should underpin growth in AIRPORT’S passenger throughput and CAPITALA’s passenger demand in 2023.

Further volume improvement for AIRPORT and CAPITALA in 2023. We project AIRPORT’s system-wide passenger throughput to rise by 29% to 101m in 2023, but it’s still a long way from matching the pre-pandemic level of 141m recorded in 2019. Already, the total passenger traffic of its entire network of airports has continued to gain traction in Sept 2022, recording 8.2m, bringing 9M-YTD numbers to 58m (+165%) or 74% of our FY22 full-year passenger throughput forecast (see chart in page 5). We expect the traffic to grow gradually 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 were 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.

We see similar trend for CAPITALA’s passenger demand in 2023, paving the way for its system-wide revenue seat km (RPK) to grow 52% to 35b in 2023, after recovering by 19b to 23b in FY22 based on our forecasts. In Nov 2022, the group already operated 125 aircrafts and is currently targeting to get 140 operational aircrafts by end-2022 and expect to reach full fleet utilisation by 2QCY23. By end-Nov 2022, it would have resumed 86% and 60% of pre-pandemic domestic and international capacity, respectively, by utilising 124 aircrafts.

Beyond 2023, we project AIRPORT’s system-wide passenger throughput to rise by another 15% to 116m in 2024, but it’s still a long way from matching the pre-pandemic level of 141m recorded in 2019. Similarly, we project CAPITALA’s RPK to rise 18% to 52b in 2024, but it still falls short of 63b prior to the pandemic in 2019.

AIRPORT’s much-needed tariff hikes not forth-coming. Meanwhile, recent consultation paper published by Malaysia Aviation Commission (MAVCOM) to keep airport tariffs status quo could work against MAHB’s ability to generate enough cash flows for capex purposes, particularly for airport expansion and maintenance. While MAVCOM also proposes a mechanism for MAHB to recoup losses incurred during Regulatory Period 1 (RP1) in Regulatory Period 2 (RP2), we are concerned over MAHB’s cash flows over RP1. While the proposals in this MAVCOM consultation paper are not cast in stone, they do significantly raise MAHB’s earnings risk over the medium term.

CAPITALA’s regularisation plans to exit PN17 in the works. Despite the rising demand, we expect CAPITALA to remain in the red over the short term as economies of scale are still lacking in its airline operations while its digital business has a long gestation period. The group plans to divest its aviation group to AirAsia X in exchange for shares which will subsequently be distributed back to its shareholders. The details of the regularisation plan are expected to be announced by end-Jan early Feb 2023 with completion by Jul 2023. We do not have any pick for the sector.

Source: Kenanga Research - 28 Dec 2022