THE Malaysian aviation sector is expected to progressively resurrect its pre-pandemic earnings dynamics with both Malaysia Airports Holding Bhd (MAHB) and Capital A Bhd (previously AirAsia Group Bhd) poised to deliver a net profit turnaround in 2022-2023.
Preferring MAHB for its attractive valuations and event catalysts, UOB Kay Hian Research said concerns over the Russia-Ukraine war and that inflationary pressures have manageable direct impacts “can be effectively transferred to end-consumers”.
“For 2022, we assume that domestic and international traffic volume recovers to 65% and 41% of 2019’s volume,” projected analyst Jack Goh in an aviation sector update.
“This is premised on (i) rising optimism about the short-lived impact of the Omicron variant and the locals’ mobility behaviour graduating into the endemic stage; (ii) pent-up travel demand amid higher retail spending and consumers’ accumulated savings; and (iii) harmonising of entry coordination and border-crossing requirements within the ASEAN region.”
Maintaining “market weight” on the aviation sector as the primary beneficiary of Malaysia’s borders re-opening which shall take effect this Friday (April 1), UOB Kay Hian Research nevertheless upgraded MAHB to “buy” with a higher target price of RM7.52 after raising its passenger traffic assumptions for 2022-2023 by 3% and 6% respectively.
“We value MAHB’s Malaysian operations at 10 times 2023 earnings before interest, taxes, depreciation, and amortisation (EBITDA) (mean) and derive a sum-of-parts (SOP) valuation of RM7.52,” justified the research house.
“We also like MAHB for its event catalyst of formulating a new operating agreement (OA) with potentially more favourable concession terms.”
However, the research house retained its “hold” rating on Capital A with target price of 72 sen based on 2023’s SOP.
“Despite expecting the easing of travel restrictions and resumption of flights to boost meaningful recovery from 2Q 2022 onwards, our concern lays in the group’s PN17 (Practice Note 17) status which will continue to impact investors’ sentiment until the issue is resolved,” opined UOB Kay Hian Research.
“Meanwhile, the group will also require more time to restore its financial health and ensure its book value deficit of -80 sen/share (as of 4Q 2021) turns profitable.”
On a brighter note, the research house deemed that the swift re-opening of regional borders and pent-up leisure demand will accelerate Capital A’s earnings recovery while the capacity will be largely supported by the group’s current 75 aircraft in operations (38% of its total fleet of 200 aircraft).
Even as fuel headwinds may compound margins weaknesses, UOB Kay Hian Research expects higher fares shall provide the buffer.
“Our channel checks revealed that AirAsia re-introduced fuel surcharge for all its domestic and international flights to transfer the cost to end-consumers in order to offset the incremental fuel costs,” added the research house.
With the recovery in global economic activity and supply disruption from the Russia-Ukraine war, jet fuel prices which usually command about 20%-30% of airlines’ operating costs have surged more than 75% year-to-date and exceeded >US$135/barrel to a near 14-year high. – March 30, 2022
