AIRPORT is parting with its entire 11% stake in GMR Hyderabad International Airport Limited (GHIAL) for USD100m (RM479m). We are positive on the divestment of this non-core asset that has not meaningfully contributed to the bottom line. Pending the completion of the deal, we maintain our forecasts, TP of RM7.00 and MARKET PERFORM call.

Divestment of a non-core 11% stake in GHIAL. AIRPORT is selling its entire 11% stake in GHIAL for USD100m (RM479m) to its partner in GHIAL, i.e. GMR Airports Limited (GAL), which will see its stake rising from 63% to 74%.

GHIAL manages the operations of Rajiv Gandhi International Airport in Hyderabad, India, and Bidar Airport in Karnataka, India, which has a concession period until 23 March 2038. GHIAL has exercised its option to extend the term for an additional 30 years.

The proposed divestment is expected to be completed in 1QCY24. The disposal PER works out to >60x based on GHIAL FY Mar 23 net profit of RM62.2m. We are positive on the divestment which is in tandem with the group’s strategy to divest its non-core assets.

Impact to financials. There is no earnings leakage from this divestment since AIRPORT doesn’t equity account GHIAL. In terms of dividends, since 2008, AIRPORT has received approximately RM31m or an average of RM2m per annum between 2008 and 2022 from its 11% stake in GHIAL. For illustration purposes, the impacts to its financials are as follows: i) AIRPORT is to record a RM114m (6.9 sen/share) gain on the disposal; ii) AIRPORT’s book value will rise from RM4.61/share to RM4.68/share as at 30 Jun 2023; and iii) the RM479m proceeds will reduce AIRPORT’s net debt and gearing from RM3.5b to RM3b and 0.45x to 0.39x as at 30 Jun 2023, respectively.

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 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 has 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 - 26 Oct 2023