• Still NEUTRAL, new SOP-derived MYR6.60 TP from MYR7.20, 9% upside. Results met expectations, with 2Q22 reporting a significant drop in losses thanks to the recovery in international passenger volumes from a low base post the reopening of borders. We continue to stay cautious of China’s zero-COVID policy that will deter Malaysia Airports’ domestic operations from achieving a full-fledged recovery to pre-pandemic levels, in our view. We also believe the likelihood of passenger service charges (PSCs) staying put will work unfavourably amidst a soft volume environment.

• Within expectations. 2Q22’s net loss of MYR58.2m led to a 1H22 net loss of MYR162.9m. The results broadly met our expectations, at 57% of our FY22 net loss forecast but below consensus’ estimates at 74%. YoY, 1H22 revenue grew by 90.9%, underpinned by the rebound in passenger volumes from a low base within the aeronautical segment – this was due to international passenger movements since the reopening of borders. Passenger volumes for 1H22 stood at 34m (1H21: 12m). For the non- aeronautical segment, the 74.6% growth in revenue was thanks to higher commercial contributions for both Malaysia and Turkey operations. 1H22 loss after tax & zakat hence narrowed to MYR162m (1H21: -MYR447m). We expect FY22 to continue seeing narrowing losses, as passenger traffic continues to see a steady pick-up.

• All eyes on China. While the loosening of restrictions in China (borders are now to foreign students) is a positive, we are still cautious that the volume shortfall by Chinese tourists will act as a hindrance to a full-fledged recovery to pre-pandemic levels – China was the second top contributor to inbound foreign travellers into Malaysia in FY19. 2Q22 passenger volumes only stood at 56% of 2Q19 levels while Jul 2022 was at 62% of Jul 2019 levels (international: c.35% of Jul 2019, domestic: c.70%). We estimate passenger volumes will have to be above 75% of pre-pandemic levels (with a 50:50 split between foreign and domestic travellers) for MAHB to return to profitability. This may take time, given residual apprehensions on travel due to new variants/viruses. Elsewhere, Malaysian Aviation Commission’s proposal to keep airport tariffs at status quo at this juncture also proves unfavourable in the face of muted passenger throughput. MAHB’s net gearing stands at 0.42x, and the group has sufficient contingency lines amounting to MYR1.3m to capitalise on the low rate environment.

• We make no changes to our earnings forecast, as results were in line with our expectations. Updating our WACC to 9% for Malaysia operations to reflect the higher risk-free rate, our TP drops to MYR6.60 and includes a 4.4% ESG discount, which implies 23x FY23F P/E or -0.5SD from its historical mean.

• Risks. Downside/upside risks to our TP and earnings estimates include the continued resurgence/faster resolution of new variants and lower-/higher- than-expected passenger volumes and PSCs.

Source: RHB Research - 26 Aug 2022