AIRPORT’s 9MCY23 passenger throughput jumped 53% YoY driven by the rebound in air travel, which was within our expectation. 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 (CPI) limits AIRPORT’s earnings upside. We keep our earnings forecasts, TP of RM7.00 and MARKET PERFORM call.

9MCY23 system-wide passenger throughput met our expectation. AIRPORT’s 9MCY23 system-wide passenger throughput (including Istanbul SGIA) came in within our expectation. Total network of airports’ passenger traffic continued to gain traction in 9MCY23, recording 88m (+53% YoY) which made up 73% of our full-year forecast of 122m (vs. 84m in 2022). As an indication that traffic recovery has continued to show buoyancy, 9MCY23 passenger movements reached 84% of 9MCY19 level. Specifically, international passenger throughput for 9MCY23 grew 106% or 85% of 9MCY19 level. Domestic passenger throughput continued to record a steady growth, reaching 85% of 9MCY19 level with 46.4m passengers (+24% YoY).

Its Malaysia operation’s total passenger movements for 9MCY23 grew by 72% with international and domestic segments recording 27.7m (+>100% YoY) and 32.9m (+27% YoY) passengers, respectively. The recommencement of 45 airlines in 9MCY23 boosted airlines’ total seat capacity recovery >75%. Similarly, Türkiye operations, namely Istanbul SGIA’s traffic continued to exhibit positive momentum, Passenger movements for Istanbul’s SGIA continued to show resilience in 9MCY23, recording more than 3m passengers each month. It is also noteworthy that the 9MCY23 total passenger throughput for Istanbul SGIA exceeded 9MCY19’s by 5%.

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 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 re-activate 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. 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, meeting the surge in travel demand after Japan reopened its borders to international travellers. AirAsia Group meanwhile is focusing on its medium-haul operations and had increased its Malaysia AirAsia X flights to 44 times weekly across 10 routes from 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’s. 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, the recent proposal to peg airport tariffs to the CPI (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 flow over the 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 - 23 Oct 2023