The Government has earmarked 2014 as a Visit Malaysia Yearand its efforts to promote Malaysia as a major tourist attraction will bode well for airport operator MAHB. Airlines, however, will see challenging times ahead on stiff competition from Malindo Air, although AirAsia is doing fairly well in cushioning the downside impact on its yields. We maintain our OVERWEIGHT call on the aviation sector. MAHB remains our Malaysian Top Pick. 

- A disappointing 1H13. While the carriers were faced with a challenging outlook, given their disappointing earnings, Malaysia Airports (MAHB MK, BUY, FV: MYR8.47) saw its earnings growth coming in line (excluding distorted costs). MAHB has benefited from the intensifying competition and capacity expansion between the airlines flying to/from its airports. 

- Buoyed by Visit Malaysia Year 2014. With the Government earmarking 2014 as a Visit Malaysia Year, we see its efforts to promote Malaysia as a major tourist attraction benefiting airport operator MAHB –  its performance will be buoyed by the expected rise in foreign tourist arrivals. Promotional work for thiscampaign began at the start of 2013 and the 2014 calendar is now filled with year-long events. It is our view that Visit Malaysia Year 2014will not only raise tourist numbers to the country, but will also create a positive spillover effect on neighbouring nations like Singapore, Indonesia and Thailand. 

- Outlook. The Government’s efforts to promote Malaysian tourism may bode well for the overall aviation sector. Even so, we still see tough times ahead for airlines due to the stiff competition from Malindo Air, although we think AirAsia (AIRA MK, BUY, FV: MYR3.94) has done fairly well in cushioning the downside impact on its yields. Furthermore, Malindo Air seems to be shifting its focus to expanding into regional routes, which suggests that the carrier is likely to underperform its profit targets. Although its move will probably take some heat off AirAsia, it will put pressure on Malaysian Airline System (MAS MK, NEUTRAL, FV: MYR0.34), as both carriers will have some overlapping routes. As previously mentioned, although the environment is challenging for the airlines, MAHB stands to benefit from their capacity expansion. Such competition can only result in fare discounts, which, in turn, will stimulate air travel demand and boost usage of its airports. 

- Valuation and recommendation. We maintain our OVERWEIGHT call on the aviation sector, with MAHB remaining our Top Pick in Malaysia. Our MYR8.47 FV on the group is based on a WACC of 7.5% that gives an implied EV/EBITDA multiple of 13.6x. We also like AirAsia and AirAsia X (AAX MK, BUY, FV: MYR1.65), despite the more challenging landscape. Their valuations remain attractive vis-à-vis  their regional peers. However, we remain concerned over MAS’ turnaround and its ability to enhance yields despite chalking up strong loads.

Source: RHB