AIRPORT’s 1QCY23 passenger throughput jumped 81% YoY but was within our expectation, driven by the rebound in air travel. We expect the recovery of business and leisure air travel to continue throughout CY23. On the flip side, MAVCOM’s recent proposal to peg airport tariffs to the Consumer Price Index (despite operating cost rising at a much faster pace) limits AIRPORT’s earnings upside. We keep our earnings forecasts, TP of RM7.00 and MARKET PERFORM call.

1QCY23 system-wide passenger throughput meets our expectation. AIRPORT’s 1QCY23 system-wide passenger throughput (including Istanbul SGIA) came in within our expectation. Total airport network of airports passenger traffic continued to gain traction in 1QCY23, recording 27m (+4% QoQ; +81% YoY) which came in at 23% of our full-year forecast of 122m (vs. 84m in 2022). As an indication that traffic recovery continued to gain traction, 1QCY23 passenger movements reached 80% of 1QCY19 levels. Specifically, international passenger throughput for 1QCY23 grew 8.1% QoQ or 78% of 1QCY19 level. Domestic passenger throughput continued to record a steady growth, reaching 81% of 1QCY19 level with 14.2m passengers.

Its Malaysia operation’s total passenger movements for 1QCY23 grew by 7% QoQ, with international and domestic segments recording 8.4m (+16% QoQ) and 10.3m (+1% QoQ) passengers, respectively. 1QCY23 international growth was contributed partly by the airline's resumption of operations by Air Arabia, China Eastern, Shenzhen Airlines and Ethiopian Airlines to nine international destinations with a total additional 978 weekly frequencies over 4QCY22. Similarly, Turkey operation namely Istanbul SGIA’s traffic continued to exhibit positive momentum, Passenger movements for Istanbul SGIA continued to show resilience in 1QCY23, recording more than 2.4m passengers each month. It is also noteworthy that the 1QCY23 international passengers for Istanbul SGIA exceeded 1QCY19’s by 42%.

Outlook. We expect business and leisure air travel to continue to recover throughout CY23 with activity poised to return to pre-pandemic levels in CY24. According to Tourism Malaysia, tourist arrival in Malaysia is expected to jump 60% to 16m in CY23 from an estimated 10m a year ago (see Exhibit 1). A key driver is Chinese tourists that historically contributed to an estimated 12% of total tourist arrivals in Malaysia. In 2024, we project tourist arrivals to jump further by 24% to 20m, compared to pre-pandemic level of 26m.

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 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, in a recent consultation paper published by MAVCOM, the proposal to raise airport tariffs based on Consumer Price Index may not be sufficient for AIRPORT to generate enough cash flows 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 flows during 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 maintain our earnings forecasts, and TP of RM7.00 which is based on 22x FY24F EPS at a 40% discount to its 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). Reiterate 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 - 20 Apr 2023