Kenanga Research & Investment

Malaysia Airports Holdings - High Cost Mars Recovery in Traffic

Publish date: Wed, 01 Mar 2023, 11:30 AM

AIRPORT’s FY22 results disappointed on higher operating cost. While its passenger number will continue to grow as air travellers return, its earnings prospects are clouded by MAVCOM’s proposal not to hike airport charges. We cut our FY23-24F net profit by 2% each, lower our TP by 3% to RM6.80 (from RM7.00), and reiterate our MARKET PERFORM call.

AIRPORT reported a FY22 core net loss of RM359m (excluding RM546m in Covid relief rebate in Turkey) which was significantly wider than our loss forecast or RM172m and consensus loss estimate of RM184m. The variance against our forecast came largely from the stubbornly high operating cost.

FY22 revenue rose 87% in tandem with a >2-fold increase in passenger throughput to 84m (56% of pre-Covid volume). Specifically, passenger throughput in Malaysia rose to 53m compared to 11m in FY21. Similarly, in Turkey, passenger throughput rose 24%. The solid revenue was driven by higher aeronautical (+108%) and non-aeronautical (+81%) segments. The better performance from non-aeronautical segment was due to higher retail revenue attributed to an increase in passenger throughput. EBITDA rose >100% due to higher yielding international passenger throughput in Turkey. Correspondingly, core net loss narrowed to RM359m compared to RM766m in FY21 due to narrower loss at Turkey which was cushioned by the recognition of deferred tax asset. A dividend of 3.91 sen was declared which came as a pleasant surprise in this quarter.

The key takeaways from its analysts briefing yesterday are as follows:

1. The group reiterated passenger’s throughput recovery is gaining traction in both Malaysia and Turkey. Malaysia operation 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. ISG (Turkey operation)’s traffic is growing steadily and expect to exceed pre Covid levels. Presently, 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. Amplifying the recovery is airlines ramping up international network to meet rising demand. The growth in passenger movements at airports in Malaysia was also supported by the introduction of new routes by 27 airlines including Denpasar-Bali, Lahore, Ujung Padang, Male, Brisbane, Bangkok, Perth, Phuket, Batam and Bangalore. There were 59 airlines operating 84 international and 35 domestic destinations at all airports managed by Malaysia Airports in Malaysia, compared to 48 airlines to 51 internationals and 32 domestic destinations in 2021.

2. The group is hopeful that the recent China's reopening of borders provides optimism for a growth in international sector in 2023 as traffic recovery growth could be accelerated. Note that China historically contributed to an estimated 12% of total tourist arrivals in Malaysia.

3. The group reiterated that the Operating Agreement (OA) provides a framework in terms of flexibility in method of airport funding through government allocation either via development expenditure or MAHB through suitable investment recovery model mechanism subject to mutual agreement.

4. The group highlighted that following the reduction of Utilisation Fees amounting to RM546m (EUR116.7m) granted due to events in 2020 and 2021 (COVID-19 period) has reduced the future liabilities on concession payment to be paid by Istanbul Sabiha Gokcen (ISG). Accordingly, the utilisation fee liability was re-assessed which has resulted in a decrease in finance cost by RM535.9m (EUR115.0m). This will result in an interest savings of RM104m (EUR22m) over three years due to early settlement of the remaining utilisation fee. Out of the EUR230m (two years utilisation fee), Airport managed to get a reduction of EUR116.7m.

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 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 aircrafts 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 has 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 and has increased its Malaysia AirAsia X flights to 44 weekly across 10 routes since November 2022.

Forecasts. We cut our FY23-24F net profit by 2% each to reflect higher operating cost.

Correspondingly, we reduce our TP by 3% to RM6.80 (from RM7.00) 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 our TP based on ESG given a 3-star rating as appraised by us (see Page 5).

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 duration. 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. Maintain MARKET PERFORM.

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 - 1 Mar 2023

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