KEY INVESTMENT HIGHLIGHTS

• MAHB’s slipped deeper into the red in 2QFY20, at -RM82.7m

• Revenue contraction recorded across the board dragged earnings during the quarter

• Full brunt of enforcement of MCO felt during the quarter

• Operational recovery in 2HFY20 unlikely to undo the deep contraction during 1HFY20

• Vaccine progress and worldwide vaccination needed to restore travel confidence

• Downgrade to Sell with a revised TP of RM4.52 per share

Quarterly performance dragged by enforcement of MCO. In 2QFY20, MAHB core earnings came in at -RM82.7m (-332%qoq) on the back of RM272.2m in revenue (-72%qoq) recorded during the quarter. Contraction was observed across the board with the biggest decline came from its Aeronautical segment with a revenue of RM45.6m (- 91%qoq). This was followed by the Non-Aeronautical segment (Rental, Retail, etc.) which also saw revenue dipping to RM193.1m (-49%qoq). The segment with the least contraction was its Non-Airport Operation (Hotel, Agriculture, etc.) which recorded a revenue of RM33.5m (- 40%qoq) during the quarter under review.

Slipping deeper into the red. Following that, MAHB recorded core losses at -RM101.8m (-153%yoy) for its cumulative 6MFY20. This was recorded on the back of its 6MFY20 revenue of RM1.206b (-52%yoy). As a result, MAHB’s earnings missed our estimates by more than 100%. However, it beats the streets’ estimate at -RM144.5m by 70%.

Without tax credit, losses would be bigger. Note that, the quarter’s result included a tax credit position from recognition of tax recoverable and deferred tax asset at RM140.8m and RM37.6m. Stripping this from the result, 2QFY20 recorded a deeper loss at -RM269.5m. We believe this figure might be more reflective of the losses incurred this quarter as a result of Covid-19.

Full brunt of the COVID-19 felt in 2QFY20. 2QFY20 was where the peak of the enforcement of the Movement Control Order (MCO) took place with subsequent extensions which abruptly halted almost all business activities under MAHB. Based on our observation, the quarter was cushioned by contractual revenue from Rental segment at RM174.9m, or ~64% of total revenue logged last quarter. Moving forward, we can expect steady revenue contribution from Rental segment as there is minimal delinquency among tenants as disclosed by Management. To recap, at 2019, revenue from Rental is circa RM1.3b, ~25% of total revenue of the group. However, we are expecting much lower Rental revenue for FY20E (prelim est. at -40% of FY19 Rental segment) that only serve to partially offset the contraction from Aeronautical Segment.

The key for aviation is vaccine. Our outlook on aviation hinges on the timeline of vaccine approval and the return of consumer confidence. Even with successful vaccine development and approval, vaccination programs should be implemented, world-wide. Without it, the threat of pandemic still looms large on both safety and economic wellbeing. That said, we are skeptical on the recovery timeline that implies significant reduction of cases by end of FY20. To achieve such feat, consequential amount of resources and organization need to be in place as of now. Taking these into consideration, our thinking is trained on a more attainable timeline of 2H21 on the impactful administration of vaccines. This impact our view on the recovery narrative for industry players such as MAHB. At this juncture, we believe impactful revenue rebound from air travels will be slanted post 2HFY21. Key consideration to our assumption is on the timing of vaccines approval, post successful trials.

Vaccination program to improve consumer confidence. Similarly, we foresee that air travel demand will not recover any time soon due to; (i) health/safety remain at risk (ii) government mandated restriction increases the hurdles of travel, and (iii) lesser ability to afford air travel because of economic weaknesses. We believe safety is the paramount driver for sustainable recovery. Without it, demand for air travel will remain low, at least, not in the level that is sufficient to save the industry from further losses. For MAHB, the next year two years will be very challenging as the company grapple with lower revenue and winning back the consumer confidence and trust.

Full recovery in FY20, unlikely. At this juncture, we foresee that the possible inflection point in terms of passenger’s traffic on monthly basis will start to take place from July 2020 onwards. However, we are of the view that a full recovery scenario will not be feasible in the near term. Based on our estimates, in a best-case scenario, passengers’ traffic FY20E will only register circa ~45% of FY19A level (with an estimated contraction of -60%yoy) vs. MAVCOM projection at ~49- 50% contraction for this year.

Earnings and dividends estimates revised. We are expecting a tough year financially for MAHB in FY20 as the deep contraction in 2Q20 is unlikely to be offset by the gradual improvement in passengers’ traffic in the second half of FY20. Following that, we are reducing our earnings estimates for year FY20-21F to core net losses to -RM384.0m and -RM95.0m respectively. Furthermore, we have also trimmed our earnings forecast for FY22F to RM410.0m. We also slash our dividends estimate to zero for FY20E/21E/FY22E on the assumption of cash preservation. The narrowing loss for FY21F and return to profitability estimated to take place in FY22F is in line with our negative view on the industry, while taking into account the gradual recovery of the industry in general.

Target price. Following our earnings revision, we are revising our target price to RM4.52 per share (previously RM4.97) following the revision in our earnings estimates. Our valuation is based on our DCF method with WACC of 6.42% and Beta of 0.99.

Downgrade to Sell. Consumer confidence in air travel remains key and may take some time to be restored; even after governments began the process of opening borders and relaxing travel restrictions. Fact is, safety and health remain the paramount factors to regain consumer confidence. Successful development of vaccine and the accessibility of the vaccine are key to ensure full recovery of aviation industry. Furthermore, additional procedures such as a 14-day quarantine from returning abroad may also hamper demand for leisure travel. As we have noted earlier, after a lockdown in 2QCY20, domestic and short-haul air travel markets will begin to show some pickups from 3QFY20 onwards, but long-haul destination is expected to take longer to recommence. In addition, domestic RPKs are expected to decline by around 40% this year, while international RPKs are likely to decline by around 60% according to IATA. Global GDP growth is expected to fall by around 5% this year, before recovering in 2021. To put the decline into context, it is around 4x larger than that of the global financial crisis, where world GDP fell by 1.3% in 2009. In contrast, the expected decline in air passenger volumes (measured by Revenue Passenger Kilometres – RPKs) is much more severe, with a decline of around 50% this year. The recovery is such that a return to the level of 2019 may not occur until 2023, taking around two years longer than global GDP. Considering all these; we are downgrading MAHB from NEUTRAL to SELL.

Source: MIDF Research - 28 Aug 2020