We maintain our NEUTRAL view on the sector. We project tourist arrivals of 27m in CY24, up 35% from 20m in CY23 and surpassing 26.1m in CY19 before the pandemic, backed by higher demand for both business and leisure air travel. The number is consistent with Tourism Malaysia’s target of 27.3m. This will translate to a sustained recovery in passenger throughput at AIRPORT (ACCEPT OFFER; TP: RM11.00) and passengers carried at CAPITALA (UP; TP: RM0.78). For AIRPORT, the poser is if the proposed privatisation by a consortium at RM11.00/share will be accepted by its minority shareholders. Meanwhile, while CAPITALA has been able to fill up seats in its planes, there is room to boost yields to ensure profitability after accounting for depreciation, aircraft leasing charges and finance cost. We do not have any pick for the sector.

Tourist arrivals underpin passenger throughput growth in CY24. We project tourist arrivals of 27m in CY24, up 35% from 20m in CY23 and surpassing 26.1m in CY19 before the pandemic, backed by higher demand for both business and leisure air travel. The number is consistent with Tourism Malaysia’s target of 27.3m (see Exhibit 1). A key driver is Chinese tourists that historically contributed to about 12% of total tourist arrivals in Malaysia. Also helping is China agreeing to extend its visa exemption facility for Malaysian citizens until the end of 2025 while Malaysia will extend the visa exemption for Chinese citizens until the end of 2026. Recall, the 30-day visa-free arrangement for Chinese and Indian visitors to Malaysia starting from Dec 2023 (while China grants inbound visitors from Malaysia 15 visa-free days between 1 Dec 2023 and 30 Nov 2024. These should drive growth in AIRPORT’S passenger throughput and CAPITALA’s passenger demand in CY24.

Further volume improvement for AIRPORT and CAPITALA in CY24. We project AIRPORT’s system-wide passenger throughput to rise by 7% to 131m in CY24. The group is optimistic of a resurgence in passenger numbers and connectivity, expected to be driven by the introduction of new airlines and services at key airports, including Kuala Lumpur International Airport, Penang, Kota Kinabalu and Langkawi. Amplifying the positive outlook is the latest airlines’ seat capacity for 2024 showing an anticipated 13% increase over 2023, underpinned by the visa-free entry for Chinese and Indian passengers expected to boost for traffic recovery, particularly in the Northeast Asia Region. All in, it expect >90% international recovery expected in the 1HCY24, with local carriers expected to increase capacity further in 2024 via reinstating remaining grounded fleet, and upgrade their fleet to 737-8 and 321 NEOs.

We see a similar trend for CAPITALA’s passenger demand in CY24, paving the way for its system-wide revenue seat km (RPK) to grow 20% to an estimated 70b in CY24, after recovering by an estimated 24b to 58b in FY23 based on our forecasts. The group reiterated that the passenger throughput recovery is gaining traction. It is targeting to re-activate 202 aircraft by end CY24 (presently 187 aircraft) available for operation and capacity to reach 83% of pre-COVID level. In addition to fleet re-activation, it expects further upside from the current high yield environment underpinned by the robust demand with forward bookings in Feb and Mar 2024 standing at 91% and 49%, respectively. It plans to launch more than 60 new routes across the group, expanding in China and India and start AirAsia Cambodia operations by mid-2024. While CAPITALA has been able to fill up seats in its planes, there is room to boost yields to ensure profitability after accounting for depreciation, aircraft leasing charges and finance cost.

AIRPORT’s privatisation at RM11/share. A consortium comprising Khazanah, EPF, New York-based GIP, and Abu Dhabi Investment Authority (ADIA) is buying out AIRPORT shares it has not already owned, translating to a 67.01% stake, for RM12.3b or RM11.00/share cash. The consortium does not intend to maintain the listing status of AIRPORT. We believe the offer price is reasonable at 26x and 20x our FY25F EPS and FY25 consensus EPS, respectively. We believe discounts of 26% and 42% to closest listed peer Airport of Thailand’s 35x consensus FY25F EPS are justifiable as Thailand’s tourism revenue is 3x larger than that of Malaysia. Assuming a full acceptance by minority shareholders, Khazanah’s stake will rise to 40% (from 33.2%) while EPF’s to 30% (from 7.9%) with the balance 30% to be owned by ADIA and GIP.

CAPITALA’s regularisation plans to exit PN17 in the works. The group is in the final stages and on track to complete the regularisation plan by 4QCY24. To recap, part of its regularisation plan to lift it out of the PN17 status involves two major corporate exercise namely: (i) divesting its aviation group to AirAsia X in exchange of shares, and (ii) a proposed listing of a unit, which is the licensee of the AirAsia brand on NASDAQ via entering a letter of intent with Atherium Acquisition Corp (GMFI), a special purpose acquisition company. We do not have any pick for the sector.

Source: Kenanga Research - 28 Jun 2024