KEY INVESTMENT HIGHLIGHTS

• Passenger movement saw -65.0%yoy contraction year-todate

• Aircraft traffic was -53.8% lower from the same period last year

• Positive development: several airlines have started to resume operations

• The current recovery does not imply the return to normalcy for air travel

• Maintain Sell with an unchanged TP of RM4.52 per share

Passenger movement saw -65.0%yoy contraction. On Friday, MAHB had released its Operating Statistics for the month of August. Passenger movement for the month of August for MAHB was recorded at 1.43m in comparison to 9.3m in the same period last year (-84.6%yoy). Meanwhile, for SGIA, passenger movement was 1.84m relative to 3.49m during August 2019 (-47.0%yoy). Overall, year-to-date passenger traffic for the entire MAHB system as of August stood at 32.7m vs. 93.51m (- 65.0%yoy) during the same period last year.

Aircraft traffic was down -53.8% against the same period last year. As of August 2020, year-to-date, in KLIA and MASB airports, aircraft traffic was at 0.34m in relation to last year at 0.74m (-53.8%yoy). In comparison, aircraft traffic at SGIA was at 0.074m vs 0.15m during the same period last year (-51.4%yoy). Overall for MAHB, aircraft traffic was down by -53.8% from the same period last year.

Airlines have started to resume flight. We do note on the recent positive development where several airlines have started to resume operations. Scoot Airlines and Jetstar Asia have resumed operations to Ipoh, Kuching and Penang International Airport in line with the introduction of the Reciprocal Green Lane which came into effect from 10 August. In KLIA, Malindo Air, Malaysia Airlines and AirAsia have resumed operations since 17 August to Singapore. As for Turkey operation, Pobeda, Jazeera and Nile Air resumed services which brings to a total of 5 foreign carriers at SGIA to-date. However, the services and number of flights inoperation remains minimal when compared against pre Covid-19 levels.

Full recovery in FY20, unlikely. We reiterate our previous stance where we opine that a full recovery scenario will not be feasible in the near term. However, at this juncture, we do concur that July-August period is the possible inflection point for MAHB on a monthly basis. Passenger and aircraft traffic will only continue to improve in the months coming. Nonetheless, from an overall perspective, we believe the current recovery does not yet imply the return to normalcy for air travel. This also includes domestic air travel. We maintain our estimate that, 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.

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 and safety remain at risk; (ii) government mandated restriction increases the hurdles of travel; and (iii) lesser ability to afford air travel due Covid-19 impact on economic well-being. 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.

Maintain our earnings estimate. 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 maintaining our earnings estimates for year FY20-22F at core net losses to -RM384.0m, -RM95.0m, RM410.0m respectively. 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. We maintain our target price at RM4.52 per share as there is no revision in our earnings estimates.

Maintain 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-days 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. Considering all these; we are maintaining our SELL call on MAHB.

Source: MIDF Research - 14 Sept 2020