AIRPORT’s 1HFY23 results met expectations. We expect the recovery of business and leisure air travel to continue throughout the year. On the flip side, MAVCOM’s recent proposalto peg airport tariffs to the consumer price index (despite operating cost rising at a much faster pace) will limit AIRPORT’s earnings upside. We keep our earnings forecasts, TP of RM7.00 and MARKET PERFORM call.

AIRPORT’s 1HFY23 core net profit of RM184.4m (excluding RM23.7m one-off donation for Türkiye earthquake) came in at 40% and 43% of our full-year forecast and the full-year consensus estimate, respectively. However, we consider the result within expectations as we expect earnings momentum to escalate in the remaining quarters as air travel continues to normalise.

YoY, its 1HFY23 revenue rose 80% in tandem with a 65% increase in passenger throughput to 56m (82% of pre-COVID volume). Specifically, passenger throughput in Malaysia rose to 39m compared to 20m in 1HFY22. Similarly, in Türkiye, passenger throughput rose 21% to 17m. The solid revenue was driven by higher aeronautical (+89%) and non aeronautical (+83%) 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 Türkiye. Correspondingly, 1HFY23 register a core net profit of RM184m compared to a loss of RM105m in 1HFY22 due to profitability registered in both Türkiye and Malaysia operations. No dividend was declared in this quarter which came in within our expectation.

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

1. The group reiterated that passenger’s throughput recovery is gaining traction in both Malaysia and Türkiye. As an indication that traffic recovery continued to show buoyancy, 1HCY23 passenger movements reached 82% of 1HCY19 level. Specifically, international passenger throughput for 1HCY23 grew by 147% or was at 82% of 1HCY19 level. Domestic passenger throughput continued to record a steady growth, reaching 83% of 1HCY19 level with 29.7m passengers (+27% YoY).

Its Malaysia operation’s total passenger movements for 1HCY23 grew by 92% with international and domestic segments recording 17.4m (+>100% YoY) and 21.5m (+32% YoY) passengers, respectively. The recommencement of 45 airlines and the commencement of 5 new airlines in 1HFY23 boosted airlines’ total seat capacity recovery to 75% at 50.5m in 1HFY23 compared to 1HFY19 at 67.3m. Similarly, Turkiye’s operations, namely Istanbul SGIA’s traffic continued to exhibit positive momentum, Passenger movements for Istanbul’s SGIA continued to show resilience in 1HCY23 where 1HCY23 total passenger throughput for Istanbul SGIA exceeded 1HCY19’s by 1.5%.

2. It is hopeful that its commercial offerings and brands operational occupancy at airport is on track to achieve 85% by end-2023 with >70 brands opened during 1HFY23. In line with the encouraging recovery in passenger throughput, Airport is expanding frontage area of retail outlets at KLIA T1 Satellite Building to increase commercial retail space by 17% from 4,855 sqm to 5,666 sqm. The construction works will commence by sequence starting with the South Zone to ensure retail offerings are preserved while maintaining comfort level of passengers, and expected to be ready somewhere in 1HCY24.

3. The group reiterated that the Operating Agreement (OA) is expected to be finalised and executed in 2HFY23 and expects MAVCOM to come up with 3rd Consultation Paper in 3Q23. The OA provides a framework in terms of flexibility in method of airport funding through government allocation either via development expenditure or AIRPORT through suitable investment recovery model mechanism subject to mutual agreement.

4. AIRPORT plans to build a sustainable recurring income via the KLIA Aeropolis land targeting global logistics, aerospace and industrial players. Presently, key tenants in KLIA Aeropolis are established global logistics and aviation players including Cainiao Aeropolise WTP Hub and DHL Express. Recall, AIRPORT was recently granted a 99-year development agreement from the Malaysian government to plan, design, develop and construct the KLIA Aeropolis land measuring 3,454.92 hectares. AIRPORT is confident and close to securing few tenants but short stop of providing a timeline.

Outlook. 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 arrivals in Malaysia are 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 expand further by 24% to 20m, compared to the prepandemic 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 the COVID-19 pandemic. In addition, Malaysia Airlines has increased its flight frequency to Tokyo from November 2022, responding to 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.

Forecasts. 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).

We like AIRPORT for: (i) it being the dominant airport operator in Malaysia and one of the largest in Türkiye, (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 peg airport tariffs to the consumer price index (despite operating cost rising at a much faster pace) 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 flows 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 - 25 Aug 2023