• Keep BUY and MYR8.31 DCF TP, 21% upside, c.2% yield. We like Malaysia Airports for the salient recovery of international tourism expected in 2H23, driven by a gradual recovery of tourist arrivals from China and resumption of airline capacity. We expect the Malaysian Aviation Commission’s 3rd Consultation Paper and the new Operating Agreement (OA) with the Government to come through in 2H23 and provide better clarity for MAHB in developing airport networks and implementing service improvements moving forward.

• June traffic snapshot. International and domestic passenger traffic in Malaysia and Turkey continue to show positive momentum and recovery rates. Jun 2023 international passenger movements registered a new high of 4.9m passengers since Feb 2020, bringing 2Q23 international passenger movements to 13.8m (+9.5% QoQ) – trailing closer to 85% of the level seen in 1Q19. In Malaysia, 2Q23 international and domestic passenger traffic grew 8.0% and 7.8% QoQ to 9.0m and 11.1m respectively. The international growth was driven by the reopening of China borders, further lifting of travel restrictions in other countries, and airline route expansions. The recommencement of 45 airlines and commencement of two new airlines in 1H23 boosted airlines’ total seat capacity recovery to 75% while the total average load factor for 1H23 exceeded 1H19 levels by 1.2ppts to 76.1%. Airport Council International (ACI) expects global passenger volumes to reach 8.4bn in 2023 (92% of 2019’s levels), with Asia- Pacific to have the strongest recovery – reaching 2.9bn (85.3% of 2019’s levels).

• Istanbul Sabiha Gokcen International Airport (SGIA) reached another significant milestone with international passenger traffic growing 12.6% QoQ and remaining above 2019’s levels (2Q23: 140% of 2Q19 level). SGIA’s domestic traffic is at 81% of 2Q19’s levels. From 1 Jun, the airport welcomed two new airlines – British Airways, which commenced services from the London- Heathrow base with four weekly flights, and Flynas from the Dammam, Saudi Arabia base with three weekly flights. Pegasus launched four new international flights – Amman, Jordan (four weekly flights), Rhodes, Greece (two weekly flights), Mytilene, Greece (two weekly flights), and Kazan, Russia (two weekly flights). We expect SGIA’s international passenger movements to see better numbers in 3Q23, driven by strong peak season demand.

• Valuation. As Malaysia’s and Turkey’s 1H23 passenger traffic accounts for 39% and 46% of our FY23 estimates (Fig 2), we deem this as in line, as we expect a stronger recovery for Malaysia in 2H23. We keep our earnings estimates. Our TP (includes 6% ESG discount) implies 7.5x 2023F EV/EBITDA, at a discount to its pre-pandemic valuation of 8.1x. Current valuation of 6.3x is undemanding compared to regional peers’ 23.9x, presenting a compelling investment proposition into a key recovery proxy – the worst should be over for aviation and tourism. Key risks: Closure of borders due to pandemic, lower-than-expected passenger volumes and PSC, and higher-than-expected opex.

Source: RHB Research - 24 Jul 2023