• BUY, new MYR8.31 TP from MYR8.28, 19% upside, c.2% yield. Malaysia Airports’ 1Q23 core net profit of MYR79.0m was at 16% and 20% of our and Streets’ estimates, on the back of a seasonally weaker quarter. Post results, our FY23 earnings are trimmed by 6%. However, we lift FY24 estimates by 3% on a recovery of international tourism in 2H23, driven by China’s gradual recovery and the resumption of airline capacity.

• Results review. 1Q23 core net profit was MYR79.0m (>+100% QoQ and YoY) after stripping out one-off Turkey earthquake donation expenses of MYR23.7m. This accounted for 16% and 20% of our and Streets’ estimates. We note that 1Q is seasonally weaker for MAHB (off-peak season, especially for Turkey operations). Group revenue of MYR1.03bn (+3.1% QoQ; +81.2% YoY) rose in tandem with the easing of travel restrictions, recovery of passenger traffic, and resumption of airline services. In the airport operations segment, aeronautical and non-aeronautical (retail) divisions saw revenue and PBT improvements from better passenger mix, higher retail spending, and higher royalty and retail revenue.

• Stronger 2H. While Turkey passenger traffic has returned to pre-pandemic levels, with international passengers surpassing 2019’s levels by 42%, we still anticipate a gradual recovery for Malaysia’s traffic (currently 74% of 2019’s level). We await a clearer picture on MAHB’s earnings prospects from the OA with the Government, which will be concluded and enforced in 2H23. MAVCOM will also finalise the gazetted passenger service charge (PSC) rates for the first regulatory period (RP1; 2024-2026) in the 3rd consultation paper to be published in 3Q23. We expect a more prominent recovery for the Malaysia operations in the coming quarters, as airlines resume and increase capacities, and with the gradual return of China’s travellers. China’s passenger traffic recovery rate in March was at only 19% of 2019’s level (Feb 2023: 12%).

• We trim FY23 earnings by 6% but lift FY24 estimates by 3% on a salient recovery of international tourism in 2H23. Our new TP is MYR8.31 (DCF), implying 7.5x 2023F EV/EBITDA – a slight discount to its 8.1x pre-pandemic valuation. MAHB’s current valuation of 6.3x is undemanding compared to regional peers’ 23.9x, presenting a compelling investment proposition into a key recovery proxy, as the worst should be over for aviation and tourism. Risks: Closure of borders, lower-than-expected passenger volumes and PSC, higher-than-expected opex.

• ESG framework update. As there is now greater focus on the E pillar due to critical climate change issues, we tweaked our ESG weightage. We assign a weightage of 50% to the E pillar, followed by 25% each to the S and G pillars. See our 2 May thematic research note Envisioning a Better Future. MAHB’s TP includes a 4% ESG discount.

Source: RHB Research - 31 May 2023