We maintain NEUTRAL on the sector. The earnings delivery (against our expectations) by the sector was stable in the recently-concluded 2QCY23 results season, underpinned by a strong 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 (UP; TP: RM0.84) out of its Practice Note 17 (PN17) status. We do not have any pick for the sector.

A stable set of 2QCY23 results. The earnings delivery (against our expectations) by the sector was stable in the recently concluded 2QCY23 results with both AIRPORT and CAPITALA meeting our expectations, vs. CAPITALA beating and AIRPORT meeting expectations in 1QCY23 (see Page 2). CAPITALA’s 1HFY23 was buoyed by solid demand for its flights and higher yields realised. AIRPORT’s passenger throughput recovery gained traction in both Malaysia and Türkiye in 1HCY23. Its Malaysia operation recorded 39m (>80% of 2019 levels) passengers in 1HCY23 driven by airlines average load factor of 75%. Amplifying the increase in load factor were the recommencement of 45 airlines and the commencement of 5 new airlines in 1HFY23 which boosted airlines’ total seat capacity recovery to 75% at 50.5m in 1HFY23 compared to 1HFY19 at 67.3m. Similarly, in Turkiye, Istanbul’s SGIA’s traffic continued to exhibit positive momentum, Passenger movements for Istanbul’s SGIA continued to show resilience in 1HCY23 with its total passenger throughput for Istanbul SGIA exceeded 1HCY19’s by 1.5%.

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 reiterated that the passenger throughput recovery is gaining traction. It has reactivated 175 aircrafts in 1HCY23 with plans to reallocate aircraft to operating countries that have stronger demand. By end-2023, the group is targeting to have all its 200 aircrafts deployed to cater for the rising demand. In addition to fleet reactivation, it expects further upside from the current high yield environment. Specifically, the group anticipate fares to pick up in 2HCY23 and peak in 4QCY2023. In 2QCY23, fares are at 15% higher than pre-Covid levels in 2QCY19. For the Group’s digital businesses, the recent induction of Teleport’s first A321 Freighter 'Awan' to Teleport’s fleet in July has added additional logistics capabilities and targeted capacity to Teleport’s network in Southeast Asia allowing Teleport to connect Southeast Asia to China, Vietnam and India even better. Through the Capital A and AirAsia airline ecosystem, the A321 freighter has best-in-class unit costs that extend Teleport’s value proposition further. Teleport’s growth rate will accelerate in the second half of 2023 with the introduction of two additional A321 freighters, the continued return to service of AirAsia’s fleet and the addition of third-party airline connectivity via strategic partnerships that serve Teleport's 1,500 growing customer base faster, cheaper and simpler than any competitors.

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 Oct 2023 with completion expected by end-4QCY23. 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 - 12 Sept 2023