KEY INVESTMENT HIGHLIGHTS

• 3QFY20 loss within our expectation as it came in at 78.8% of our FY20 estimate

• Sequentially improved aeronautical segment, yet it remains far below pre pandemic level

• Not all doom and gloom

• Shift from our previous bearish outlook to a more moderate narrative

• FY20F loss revised upwards to –RM526.6m to account for impact from enforcement of CMCO

• Upgrade to NEUTRAL with revised TP at RM5.10 per share

Within expectation. Malaysia Airports recorded a 3QFY20 core losses of -RM286.5m (-355.0%qoq and -293.4%yoy). This performance was recorded on the back of sequentially higher revenue at RM396.7m (+45.7%qoq and -70.7%yoy). Cumulatively, its 9MFY20 core losses widened to –RM304.5m (-168.2%yoy). We deemed this result to be broadly within our expectation as the loss came in at 78.8% of ours and 66.5% of consensus expectation from full year estimate.

Sequentially improved aeronautical segment, yet it remains below pre pandemic level. MAHB performance was supported by improved top line from its aeronautical segment. For its Malaysian aeronautical segment, the revenue recorded was at RM129.0m (+289.7%qoq and -73.8%yoy). The same trend was also observed for its Turkish aeronautical segment which saw revenue recorded at RM99.7m (+691%qoq and -55%yoy).

Contraction of passenger movement. Based on our observation, passenger movement contracted by -69.6% for Malaysian operation in 9M20 and -53.5% for Turkey operation during the same period. Both countries recorded deeper contractions in international passengers compared to 9M19 versus the operating of domestic passenger. In Malaysia, domestic contraction was recorded at -62.6%yoy vs - 76.5%yoy for international whereas Turkey was at -47.7%yoy domestic and -62.7%yoy for international traffic.

Non-aeronautical segment declines. On other hand, nonaeronautical segment saw a decline for both Malaysia and Turkey operation at RM102.7m (-39.8%qoq and -75.2%yoy) and RM19.8m (- 12qoq% and -87%yoy). This is despite multi-fold improvement in the quarter’s retail sales in both countries. However, the overall performance was dragged by lower rental and royalties collections which outweigh the positive growth in retail sales.

Not all doom and gloom. Despite the erosion on its top line; the group managed to prevent further bleeding from its successful cost containment efforts. During the quarter, MAHB successfully reached its target of 20% cost reduction compared to FY19 operating expenses. This is in line with contraction of passenger movements, and further internal cost rationalization initiatives to reduce staff costs, utilities and maintenance, among others. Based on management disclosures, cumulatively, for 9M20 adjusted costs stood at RM1.19b vs RM1.50b during the same period last year, 9M19.

Regulatory changes to take shape in 2021. Negotiations for the operating agreement between MAHB and Government of Malaysia are expected to be finalized and announced by the end of CY20. This will give room for fresh funds to be injected via joint-ventures with new stakeholders for airports development in Malaysia. Meanwhile, the Regulated Asset Base (RAB) framework is scheduled to come into effect in CY21. The key difference will be that the funding of airports capital expenditures will fall onto MAHB instead of the Government and is linked to the fees charged on airport users. We believe this will promote a more robust airports infrastructure and ecosystem that will benefit Malaysian as a whole.

Further cut to our earnings estimate. Despite meeting our expectation, we are cutting our earnings estimate to account for potentially larger losses due to the extension of movement control orders which restricts intra-state travel movement in Malaysia. We cut our earnings estimate for FY20E to –RM526.6m from -RM384.0m. Moving forward, premise on optimism of vaccine development and subsequent recovery in air travel demand, we forecast a slight positive PAT of RM57.5m for FY21F compared to a narrow loss previously at –RM98.0m. Despite the shift from our previous bearish outlook to more moderate narrative, we believe that full recovery for MAHB and by extension aviation industry in Malaysia will not be feasible in FY2021. We postulate that the return for consumer confidence will take some time even after successful introduction and administration of vaccines, beyond FY2021.

Target price. We are revising our target price to RM5.10 per share (previously RM4.52) following the revision in our earnings estimates. Our valuation is based on our DCF method with WACC of 7.0%.

Upgrade to NEUTRAL. Consumer confidence in air travel remains key and may take some time to be restored; even after governments begin the process of opening borders and relaxing travel restrictions. The reason being is that, safety is the paramount factor to regain consumer confidence. Successful vaccines administration and proven efficacy of the treatment are necessary to ensure full recovery of aviation industry. Previously, we justified a bleak outlook facing the company with border controls and worsening pandemic crippled the business operations. With positive development on the vaccine front, we believe that the future of the aviation industry has improved significantly which will impact aviation players such as MAHB positively. Following that, we foresee that a more definitive demand recovery in the 2HFY21 as a result of the administration of the Covid-19 vaccine. Hence, we are upgrading our recommendation on MAHB to NEUTRAL (from SELL).

Source: MIDF Research - 1 Dec 2020