Growth in Outbound Travel to Moderate Further in 2H24

According to VISA Global Travel Intentions Study 2023, the top 10 international destinations preferred by Malaysians are:

To delve further into Malaysians’ travel desire, we examined the statistics published by relevant agencies in Japan, Australia and Indonesia, being the top 3 favourite travel destinations for Malaysians. Looking at the growth of Malaysia tourists in these sample countries, we believe Malaysians may begin to feel “travel lethargic” soon as the growth has started moderating (Figure 2).

We are inclined to believe that Malaysia’s outbound travel would slow down further in 2H24. Indeed, at the current exchange rate of USDMYR4.70, travelling overseas for holiday may not be fun anymore as far as our purchasing power is concerned. Importantly, the “revenge travel” post Covid-reopening would likely normalise as the desire would have been satisfied by the numerous trips two years ago. A quick random check among colleagues revealed that all of them have travelled more than 3 times since the reopening of borders in Apr-22.

In addition, the rationalisation of government subsidy on fuel is expected to have an adverse impact on Malaysians travelling abroad. The subsidy removal would likely add to the burden of consumers, which we think one of the belt-tightening ways would be cutting back on travelling budget.

Inbound Travel to Remain Robust in 2H24

Having said that, we continue to expect the inbound tourism would remain robust on the back of the weak ringgit, relaxation of visa requirement and increase in flight capacity. According to Capital A, the company is expected to increase its operational aircraft to 204 by 4Q24 from 167 in 1Q24. In addition, given our in-house USDMYR forecast of 4.65, tourism activity would likely remain flourishing in 2024.

A few days ago, Tourism, Arts and Culture Minister Datuk Seri Tiong King Sing was quoted as saying that Malaysia recorded 7.56mn (+27.5%) foreign tourists in the first four months of the year, representing the second-highest recipient of foreign tourists in Asean, behind Thailand with 12mn tourists and ahead of Vietnam with 6.2mn, Singapore 5.7mn and Indonesia 4.1mn. Comparing this with official targets (Figure 3), Malaysia has only achieved 28% of its goal set for 2024, implying that the government would need to beef up its effort in promoting and attracting foreign tourists.

16.1% Growth in Passenger Movements in 5M24

The 27.5% growth in foreign tourists in Malaysia is fully reflected in Malaysia Airports’ (MAHB) passenger movements. From January to May 2024, the company has recorded a growth of 16.1% to 37.1mn in passenger movements, supported mainly by the international segment (38.1%) that offset the decline in the domestic segment (-1.5%). In our forecast, we expect MAHB’s passenger movements to surpass the pre-pandemic level (105.3mn) to reach 118mn this year before inching higher to 121.5mn next year.

MAHB Outperformed FBMKLCI

In 1H24, it was another significant milestone for the aviation sector as MAHB has finally obtained the long-awaited new concessions which extended the duration to 2069. Also, Capital A has announced the regularisation plan during this period, hoping to uplift the company from the PN17 status. Meanwhile, 1H24 was also full of surprises. First, the team-up of Khazanah, EPF and Global Infrastructure Partner (GIP) in privatising, pending satisfaction of pre-conditions, has sprung positive surprises to minority shareholders as the offer price is fixed at the record high of RM11.00/share. In addition, the mutual agreement between Malaysia and China to extend visa-free policies until the end of 2025 is another pleasant surprise for holiday goers. To a lesser extent, we also view the revised Malaysia My Second Home (MM2H) program with lower barriers as a positive catalyst to propel the aviation sector.

In terms of earnings and share price performance, the aviation sector chalked up revenue and PBT growth of 82% and 49% respectively (Figure 5) on the back of: 1) sustained recovery in travel demand; 2) increase in airfare and reduction in cost (fuel), which partially mitigated by ringgit depreciation. The share price performance was mixed as MAHB’s price rally (+30%) has been supported by the impending general offer, while Capital A (+2%) and AAX (-22%) were still undergoing the restructuring and merger exercise. For this period, only MAHB outperformed the FBMKLCI (Figure 6).

2H24 Outlook

We reiterate our view on moderating outbound travel vs. resilient inbound travel in Malaysia in 2H24 as abovementioned. Also, we look forward to 2 major follow-up announcements that would steal the limelight in 2H24. Firstly, it is crucial for the interested parties (Khazanah, EPF and GIP) to fulfil the pre-conditions before making a valid general offer to privatise MAHB for RM11/share. Hence, we look forward to announcements pertaining to satisfactions of these pre-conditions, including:

1. The Receipt of a Non-infringement Decision From MAVCOM;

2. The receipt of a non-infringement decision from the Turkish Competition Authority;

3. Merger control approval from the General Authority for Competition Saudi Arabia;

4. Merger Control Approval From the Egyptian Competition Authority;

5. Application to the SC to seeks its consent for the Offer to be announced subject to the preconditions.

In terms of Capital A’s regularisation plan, there will be a series of corporate development to be carried out before the company is free from its PN17 status. This would include AirAsia X (AAX) obtaining its shareholders’ approvals for exchanging their AAX shares with AirAsia Group (AAG) shares on the basis of 1:1 with free warrant on the basis of 1:2 for the later to takeover AAX’s listing status. Then, Capital A would have to obtain shareholders’ approval on proposed disposals of AirAsia Aviation Group and AirAsia Berhad for total considerations of RM6.8bn to be satisfied by 2.3bn consideration shares in AAG at RM1.30/share plus assumption of 3.8bn debts owing to AAB. This will be followed by distribution of dividend-in-specie where Capital A’s each shareholder would get 397 AAG shares for every 1,000 shares, assuming no conversion of warrants and RCUIDS.

Forecast & Valuation

No change to our FY24-26 earnings projections.

Valuation

We maintain our neutral stance on the aviation sector as we look forward to the stronger inbound and moderating outbound traffics to play out in 2H24.

MAHB: We keep MAHB’s far value at RM11.00, matching the general offer in the making. Based on the offer price of RM11/share, the implied acquisition PE works out to an exorbitant 27x FY25 EPS. We advise investors to accept the offer.

Capital A: We believe the market has only partially priced in the full potential of the merger between Capital A’s aviation business and AAX. However, we are not in a rush to upgrade Capital A as a misjudgement can be devastating if the restructuring and merger process hit a snag, which may trigger a de-listing process. As such, we maintain Hold recommendation on Capital A with a lower target price of RM0.94 (RM0.96 previously), after pegging a significant 40% discount to its fair value of RM1.56/share based on revised 9x CY24 EPS.

Source: TA Research - 28 Jun 2024