AIRPORT’s FY22 passenger throughput beat our expectation by 8% driven by a stronger-than-expected rebound in air travel. On a sustained strong recovery beyond FY22, we raise our FY23-24F passenger throughput assumptions. On the flip side, MAVCOM’s recent proposal to cap airport tariffs (despite rising operating cost) limits earnings upside. We narrow our FY22F net loss by 6%, raise our FY23F net profit by 3%, lift our TP by 15% to RM7.00 (from RM6.10) but maintain our MARKET PERFORM call.

FY22 system-wide passenger throughput beat our full-year forecast by 8%. AIRPORT’s FY22 system-wide passenger throughput (including Istanbul SGIA) beat our expectation by 8% at 84m (see page 3), accounting for 60% of pre-COVID 2019 level. Its Malaysia operations recorded 53m (50% of 2019 levels) passengers in 2022 driven by airlines average load factor of 71% compared to 52% in 2021. Amplifying the increase in load factor were 59 airlines operating at all airports managed by Malaysia Airports compared to 48 in 2021. Specifically, in 2022, there were 84 international (+65%) and 35 domestic destinations (+9%). Similarly, Sabiha Gokcen International Airport (SGIA) in Istanbul recorded 31m passengers, accounting for 87% of the 2019 level. However, its international passenger movements surpassed the 2019 level by 10.4%, while domestic passenger movements were at 15.5m or 71.2% of the 2019 level.

Outlook. 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 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 demand in 2023. We expect traffic trajectory to grow in subsequent months as airlines continue to reactivate more aircraft to match increasing demand. Amplifying traffic growth trajectory is aircraft movements that are pointing towards increased medium and long haul flights to Perth, Sydney and Auckland, Southeast Asia and South Asia destinations. Recently, KL International Airport saw the return of Kuwait Airways after a seven-year hiatus, while two other foreign carriers i.e. KLM Royal Dutch Airlines and All Nippon Airways, will resume non-stop flight operations to Amsterdam and Tokyo, respectively, after temporarily ceasing operations due to COVID-19 pandemic. In addition, Malaysia Airlines increased its flight frequency to Tokyo from November 2022, in anticipation of the surge in travel demand following the reopening of Japan's borders to international travellers. AirAsia Group meanwhile is focusing on its medium haul operations by increasing its Malaysia AirAsia X flights to 44 weekly across 10 routes commencing November 2022.

We like AIRPORT for: (i) it being the dominant airport operator in Malaysia and one of the largest in Turkey, (ii) being a good proxy to the recovery of air travel and tourism locally, regionally and globally, and (iii) its strong shareholders who have demonstrated unwavering support through thick and thin (including during the pandemic and a massive cash call in 2014), However, recent proposal to keep airport tariffs status quo could work against AIRPORT’s 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 losses incurred during RP1 in RP2, we are concerned over AIRPORT’s cash flow over RP1. While the proposals in the MAVCOM consultation paper are not cast in stone, they do significantly raise AIRPORT’s earnings risk over the medium term.

We narrow our FY22F net loss by 6%, raise our FY23F net profit by 3% as we raise our FY23-24F passenger throughput assumptions by 15% and 9% to 116m and 126m, respectively (from 101m and 116m). We introduce our FY24F earnings (based on a passenger throughput assumption of 126m). We lift our TP by 15% to RM7.00 (from RM6.10) as we roll forward our valuation base year to FY24F (from FY23F). Our TP is based on 22x FY24F EPS or at a 40% discount to closest peer Airport of Thailand due to its smaller market capitalisation. Note that Thailand’s tourism revenue is 3x larger than Malaysia. There is no adjustment to TP based on ESG given a 3-star rating as appraised by us (see Page 5).

Risks to our call include: (i) endemic and pandemic occurrences deterring air travel, (ii) unfavourable terms for airport operations, and (iii) risks associated with overseas operations.

Source: Kenanga Research - 30 Jan 2023