We maintain our NEUTRAL rating on the sector. There was a sequential improvement in earnings delivery in the recently concluded 1QCY23 results due to stronger-than-expected recovery in the demand for air travel and yields. We expect the demand for business and leisure air travel to continue to recover throughout CY23. However, each player has its own unique set of issues. For AIRPORT (MP; TP: RM7.00), a tariff hike pegged to CPI recently proposed by Malaysia Aviation Commission (MAVCOM) may not be sufficient for AIRPORT to generate enough cash flows for capex purposes, particularly for airport expansion and maintenance. Meanwhile, the clock is ticking on a more viable and holistic regularisation plan to lift CAPITALA (MP; TP: RM0.84) out of its Practice Note 17 (PN17) status. We do not have any pick for the sector.

A good set of 1QCY23 results. There was a sequential improvement in earnings delivery in the recently concluded 1QCY23 results as CAPITALA beat while AIRPORT met our expectation, vs. CAPITALA met with our expectation and AIRPORT disappointed in the previous 4QCY22 (see Page 2) quarter. CAPITALA’s 1QFY23 result beat expectations from stronger-than expected demand for its flights and higher yields realised. AIRPORT’s 1QCY23 passenger’s throughput recovery is gaining traction in both Malaysia and Türkiye. Its Malaysia operation recorded 26.8m (80% of 2019 levels) passengers in 1QCY23 driven by airlines average load factor of 77%. Amplifying the increase in load factor were 63 carriers from seven regions currently operating at airports in Malaysia, at 85% of 2019 levels. Similarly, its Türkiye operation’s traffic is growing steadily recording >2.4m passengers each month in 1QCY23 with international passengers exceeding 1QCY19 level by 42%.

Tourist arrivals to rise 60% to 16m in CY23. We expect business and leisure air travel to continue to recover throughout the year 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. 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. 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 the COVID-19 pandemic. In addition, Malaysia Airlines has increased its flight frequency to Tokyo from November 2022. AirAsia Group meanwhile is focusing on its medium-haul operations by increasing its Malaysia AirAsia X flights to 44 weekly across 10 routes from November 2022.

Further volume improvement for CAPITALA in CY23. Looking farther into CY23, we project CAPITALA’s system-wide revenue seat km (RPK) to grow 79% to 43b in FY23, after recovering by 20b to 24b in FY22. CAPITALA expects its passenger demand to continue to rise moving farther into 2023, judging from the encouraging load factors recorded at 159 international routes. The group has reactivated 157 aircrafts in 1QCY23 with plans in place to reallocate aircrafts to operating countries that has stronger demand. By end of 2023, the group is targeting to have all its 215 aircrafts deployed to cater for the rising demand. Its digital segment is expected to remain loss-making. airasia Super App is expected to grow, underpinned by the continued resurgence of travel demand from borders reopening and tactical campaigns, alongside expected growth from airasia Food, Ride and Xpress. Additionally, Teleport is expected to continue expanding throughout 2023 as it adds new international lanes and delivery hubs. BigPay has also launched its digital lending platform to provide new loan products.

Pegging airport tariffs to CPI may not be sufficient to raise enough for capex. Meanwhile, in a recent consultation paper published by MAVCOM, the proposal to raise airport tariffs based on CPI 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 Regulatory Period 1 (RP1) in Regulatory Period 2 (RP2), we are concerned over AIRPORT’s cash flows over RP1.

CAPITALA’s regularisation plans to exit PN17 in the works. The group plans to announce the details of its PN17 regularisation plan by early-July 2023 with completion expected by end-3QCY23. While we continue to like CAPITALA for being a beneficiary of the recovery in air travel as the pandemic comes to an end, we are mindful of it still being under the PN17 status.

Source: Kenanga Research - 15 Jun 2023