INVESTMENT HIGHLIGHTS

• AAGB inks major deal with Airbus to develop aerospace industry

• Airbus has a strong presence in Malaysia involving tier 1 and tier 2 suppliers with its sourcing and services businesses valued at roughly USD400m annually for the local economy.

• AAGB as the largest airline customer for the Airbus A320 family benefit in terms of sourcing efficiency for aircraft parts.

• Maintain BUY with unchanged target price of RM2.08 per share

AAGB inks major deal with Airbus. AAGB has signed a memorandum of agreement to support the development of the Malaysian aerospace industry. The agreement entails the expansion of Airbus in its maintenance, repair and overhaul (MRO) in Malaysia and the establishment of the Airbus Malaysia Digital Initiative to enhance the competitiveness of the local aerospace industry to make the country a regional aerospace hub. Approximately USD120m or RM505m has been allocated by Airbus for the abovementioned initiatives.

Our view. With ASEAN being a vital agent for MRO activities in Asia, Malaysia and AAGB is poise to benefit from the growth in the aerospace industry. In fact, Malaysia’s exports of aircraft parts and components have almost quadrupled from RM2.23 billion in 2012 to a record high of RM8.49 billion in 2018, maintaining a contribution of more than 1.0% to Malaysia’s total trade value for the past eight years. The growth was mainly driven by expansion of aerospace manufacturing activities which also translated to the increase of revenue of Malaysia’s aerospace industry. For further detail on Malaysia’s aerospace industry, please refer to our aviation sector report, The nation’s aerospace industry is set to take off’ dated 18 July 2019.

Positive spill over effects on AAGB. Airbus has a strong presence in Malaysia involving tier 1 and tier 2 suppliers with its sourcing and services businesses valued at roughly USD400m annually for the local economy. Local aerospace companies such as Spirit Aerosystems (Tier 1 supplier) assemble the Wing Leading Edge for the Airbus A350XWB while 60% of composite parts for A320 come from CTRM (Tier 2 supplier) facilities in Melaka. Therefore, AAGB as the largest airline customer for the Airbus A320 family (total order of more than 500 aircraft from the said model) could benefit in terms of sourcing efficiency for aircraft parts. We also believe that the deal with Airbus could indirectly manage costs. AAGB is currently facing higher MRO expenses amidst larger fleet which are leased. Recall, MRO expenses for AAGB rose by +84.4%yoy in 1HFY19. This bode well, on top of the company’s current digitalisation plan which will improve the overall cost structure.

Source: MIDF Research - 3 Sept 2019