AIRPORT’s FY23 passenger throughput jumped 42% YoY—which met our expectation—driven by a rebound in air travel. We expect the recovery of business and leisure air travel to continue throughout FY24. On the flip side, MAVCOM’s recent proposal to peg airport tariffs to CPI will limit AIRPORT’s earnings upside. We keep our forecasts, TP of RM7.00 and MARKET PERFORM call.

FY23 system-wide passenger throughput met our expectation. AIRPORT’s FY23 system-wide passenger throughput (including Istanbul SGIA) came in within our expectation. Its total passenger traffic continued to gain traction in FY23 at 119m (+42% YoY). As an indication that traffic recovery has continued to show buoyancy, FY23 passenger movements reached 85% of FY19 level. Amplifying the traffic growth was the increase in travellers’ confidence and air travel demand, allocation of more slots at other international airports, reactivation of more aircraft, new aircraft delivery and China’s reopening of borders in Jan 2023. Specifically, international passenger throughput for FY23 grew 80% or 86% of FY19 level. Domestic passenger throughput continued to record a steady growth, reaching 83% of FY19 level with 61m passengers (+19% YoY).

Its Malaysia operation’s total passenger movements for FY23 grew by 55% with international and domestic segments recording 39m (+>100% YoY) and 43m (+20% YoY) passengers, respectively. The recommencement of >45 airlines in FY23 boosted airlines’ total seat capacity recovery by >75%. Similarly, Türkiye operations, namely Istanbul SGIA’s traffic continued to exhibit positive momentum. Passenger movements for Istanbul’s SGIA exceeded 2019 levels, registering 38m passengers, an increase of 4.5% over 2019.

Outlook. We expect business and leisure air travel to continue to recover throughout FY24. According to our in-house projection, tourist arrivals in Malaysia are expected to jump 35% to 27m (consistent with Tourism Malaysia’s projection to return to pre-pandemic levels) in FY24 from an estimated 20m a year ago (see Exhibit 1). A key driver is Chinese tourists that had historically contributed to an estimated 12% of total tourist arrivals in Malaysia. Furthermore, tourist arrivals is expected to be boosted by the 30-day visa-free regime for Chinese and Indian visitors to Malaysia starting from Dec 2023 and China, allowing Malaysian inbound visitors 15 visa-free days between 1 Dec 2023 and 30 Nov 2024.

This should underpin growth in AIRPORT’s passenger throughput demand in 2024. 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 Nov 2022.

Forecasts. Maintained.

Valuations. We also maintain our TP of RM7.00 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).

Investment case. 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 - 2 Feb 2024