Malaysia Airports Holdings - Sticky High Operating Cost

Date: 
2023-11-30
Firm: 
KENANGA
Stock: 
Price Target: 
7.00
Price Call: 
HOLD
Last Price: 
8.44
Upside/Downside: 
-1.44 (17.06%)

AIRPORT’s 9MFY23 result missed our forecast but met market expectation. We expect the recovery of business and leisure air travel to continue throughout the year. On the flip side, the absence of insignificant airport tariffs will cap AIRPORT’s earnings. We cut our FY23F net profit by 8% but keep our TP of RM7.00 and MARKET PERFORM call.

AIRPORT’s 9MFY23 core net profit of RM303m (excluding one-off donation for Türkiye earthquake of RM23.7m and provision for doubtful debts of RM24.7m) missed our expectation at only 64% of our full-year forecast but met market expectations at 75% of the full-year consensus estimate. The variance against our forecast came largely from the sticky high operating cost.

YoY, its 9MFY23 revenue rose 67% in tandem with a 65% increase in passenger throughput to 88.8m (85% of pre-COVID volume). Specifically, passenger throughput in Malaysia rose to 61m compared to 35m in 9MFY22. Similarly, in Türkiye, passenger throughput rose 27% to 28m. The solid revenue was driven by higher aeronautical (+75%) and non-aeronautical (+65%) segments. The better performance from non-aeronautical segment was due to higher retail revenue attributed to an increase in passenger throughput. EBITDA rose >100% due to higher yielding international passenger throughput in Türkiye. Correspondingly, 9MFY23 register a core net profit of RM303m compared to a loss of RM172m in 9MFY22 due to profitability registered in both Türkiye and Malaysia operations. No dividend was declared in this quarter which came in within our expectation.

The key takeaways from its analysts briefing yesterday are as follows:

1. The group reiterated that passenger’s throughput recovery is gaining traction in both Malaysia and Türkiye. As an indication that traffic recovery continued to show buoyancy, 9MCY23 passenger movements reached 85% of 9MCY19 level. Specifically, international passenger throughput for 9MCY23 grew 106% or 85% of 9MCY19 level. Domestic passenger throughput continued to record a steady growth, reaching 85% of 9MCY19 level with 46.4m passengers (+24% YoY). 

Its Malaysia operation’s total passenger movements for 9MCY23 grew by 72% with international and domestic segments recording 27.7m (+>100% YoY) and 32.9m (+27% YoY) passengers, respectively. The recommencement of 45 airlines in 9MCY23 boosted airlines’ total seat capacity recovery by >75%. Similarly, Türkiye operations, namely Istanbul SGIA’s traffic continued to exhibit positive momentum. Passenger movements for Istanbul’s SGIA continued to show resilience in 9MCY23, recording more than 3m passengers each month. It is also noteworthy that the 9MCY23 total passenger throughput for Istanbul SGIA exceeded 9MCY19’s by 5%.

2. The group does not foresee any material impact on its operations and traffic volumes arising from the suspension of MYAirline on 12 October 2023. The destinations and routes previously serviced by MYAirline are now seamlessly covered by AirAsia, Batik Air, and Malaysia Airlines. It is optimistic that resurgence in passenger numbers and connectivity expected to be driven by the introduction of new airlines and services at key airports, including Kuala Lumpur International Airport, Penang, Kota Kinabalu and Langkawi.

3. The group reiterated that the Operating Agreement (OA) is expected to be finalised and executed in end 2023 and expects MAVCOM to come up with 3rd Consultation Paper in end Dec 23. The OA provides a framework in terms of flexibility in method of airport funding through government allocation either via development expenditure or AIRPORT through suitable investment recovery model mechanism subject to mutual agreement.

4. AIRPORT plans to build a sustainable recurring income via the KLIA Aeropolis land targeting global logistics, aerospace and industrial players. Presently, key tenants in KLIA Aeropolis are established global logistics and aviation players including CainiaoAeropolise WTP Hub and DHL Express. Recall, AIRPORT was recently granted a 99-year development agreement from the Malaysian government to plan, design, develop and construct the KLIA Aeropolis land measuring 3,454.92 hectares. AIRPORT is confident and close to securing few tenants but short stop of providing a timeline.

Outlook. We expect business and leisure air travel to continue to recover throughout CY23 with activity poised to return to prepandemic levels in CY24. According to Tourism Malaysia, tourist arrivals in Malaysia are expected to jump 60% to 16m in CY23 from an estimated 10m a year ago (see Exhibit 1). A key driver is Chinese tourists that historically contributed to an estimated 12% of total tourist arrivals in Malaysia. In 2024, we project tourist arrivals to expand further by 24% to 20m, compared to the prepandemic level of 26m.

This should underpin growth in AIRPORT’s passenger throughput demand in 2023. We expect traffic trajectory to grow in subsequent months as airlines continue to reactivate more aircrafts to match increasing demand. Amplifying traffic growth trajectory is aircraft movements that are pointing towards increased medium and long-haul flights to Perth, Sydney and Auckland, Southeast Asia and South Asia destinations. Recently, KL International Airport saw the return of Kuwait Airways after a seven-year hiatus, while two other foreign carriers i.e. KLM Royal Dutch Airlines and All Nippon Airways, will resume non-stop flight operations to Amsterdam and Tokyo, respectively, after temporarily ceasing operations due to the COVID-19 pandemic. In addition, Malaysia Airlines has increased its flight frequency to Tokyo from November 2022, responding to the surge in travel demand following the reopening of Japan's borders to international travellers. AirAsia Group meanwhile is focusing on its medium-haul operations by increasing its Malaysia AirAsia X flights to 44 weekly across 10 routes commencing November 2022.

Forecasts.We cut our FY23F net profit forecast by 8% to reflect the higher-than-expected operating cost but keep our FY24F numbers.

We maintain our TP of RM7.00 which is based on 22x FY24F EPS at a 40% discount to its closest peer Airport of Thailand due to its smaller market capitalisation. Note that Thailand’s tourism revenue is 3x larger than Malaysia. There is no adjustment to TP based on ESG given a 3-star rating as appraised by us (see Page 5).

We like AIRPORT for: (i) it being the dominant airport operator in Malaysia and one of the largest in Türkiye, (ii) being a good proxy to the recovery of air travel and tourism locally, regionally and globally, and (iii) its strong shareholders who have demonstrated unwavering support through thick and thin (including during the pandemic and a massive cash call in 2014),

However, a recent proposal to peg airport tariffs to the consumer price index (despite operating cost rising at a much faster pace) could work against AIRPORT’s ability to generate enough cash flow for capex purposes, particularly for airport expansion and maintenance. While MAVCOM also proposes a mechanism for AIRPORT to recoup losses incurred during RP1 in RP2, we are concerned over AIRPORT’s cash flows over RP1 duration. While the proposals in the MAVCOM consultation paper are not cast in stone, they do significantly raise AIRPORT’s earnings risk over the medium term. Maintain MARKET PERFORM.

Risks to our call include: (i) endemic and pandemic occurrences, deterring air travel, (ii) unfavourable terms for airport operations, and (iii) risks associated with overseas operations.

Source: Kenanga Research - 30 Nov 2023

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