Malaysia Airports Holdings - Strong Outlook But Tariff Hikes Elusive

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AIRPORT’s FY23 result met our forecast but beat market expectations. Its FY23 core net profit more than doubled buoyed by a 42% increase in passenger throughput. While we expect its traffic recovery to sustain into FY24, the absence of airport tariff hikes will cap its ability to invest for future growth. We keep our FY24F forecasts but raise our TP by 14% to RM8.00 (from RM7.00). Reiterate MARKET PERFORM.

AIRPORT’s FY23 core net profit of RM443m (excluding one-off gain from disposal of Hyderabad Airport of RM125m and provision for doubtful debts of RM24.7m) met our forecast but beat the consensus estimate by 12%. A final dividend of 10.8 sen was declared which came in within our expectation.

YoY, its FY23 revenue rose 57% in tandem with a 42% increase in passenger throughput to 119m (85% of pre-COVID volume).

Specifically, passenger throughput in Malaysia rose to 82m compared to 53m in FY22. Similarly, in Türkiye, passenger throughput rose 20% to 38m. The solid revenue was driven by higher aeronautical (+63%) and non-aeronautical (+57%) segments. The better performance from non-aeronautical segment was due to higher retail revenue attributed to an increase in passenger throughput. Its FY23 core net profit more than doubled buoyed by high-yielding international passenger throughput in Türkiye.

QoQ, its 4Q23 revenue rose 8% due to higher aeronautical (+7%) and non-aeronautical (+8%). The higher aeronautical was due to higher recognition of MARCS (Marginal Cost Support). Generally, MARCS is a compensation mechanism under the Operating Agreement (OA) where the government is obliged to pay MAHB for any difference between what is permitted to be collected (i.e. benchmark PSC) and what is actually collected (i.e. actual PSC).Similarly, the higher topline in non- aeronautical was driven by higher pax spending, coinciding with school holidays and the festive season, further bolstered by the opening of 64 additional shops. However, its core net profit rose by a sharper 26% due a positive tax credit on Turkey’s deferred taxation arising from the inflationary adjustment.

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, CY23 passenger movements reached 85% of CY19 level. Specifically, international passenger throughput for CY23 grew 80%-86% of CY19 level. Domestic passenger throughput continued to record a steady growth, reaching 83% of FY19 level with 61m passengers (+19% YoY). Its Malaysia operation’s total passenger movements for FY23 grew by 55% with international and domestic segments recording 39m (+>100% YoY) and 43m (+20% YoY) passengers, respectively. The recommencement of >45 airlines in FY23 boosted airlines’ total seat capacity recovery by >75%. Similarly, passenger movements for Istanbul’s SGIA exceeded 2019 levels, registering 38m passengers, an increase of 4.5% over 2019.

2. The group is optimistic on prospects going forward driven by passenger traffic growth and further strengthened by the group's on-going strategy in enhancing its airline and hub connectivity, rejuvenating commercial and retail spaces as well as accelerating off-terminal opportunities. 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. Amplifying the positive outlook is latest airlines’ seat capacity for 2024 shows a 13% increase over 2023 underpinned by the visa-free entry for Chinese and Indian passengers expected to boost for traffic recovery,particularly in the Northeast Asia Region. All in, it expect>90% international recovery expected in the 1HCY24, with local carriers expected to increase capacity further in 2024 via reinstating remaining grounded fleet and upgrading to 737-8 and 321 NEOs.

3. It is positive that commercial reset in its retail segment is progressing well, with positive impact reflected in higher occupancy and turnover. The group reiterated that Initiatives will continue into 2024 with more outlets to open, bringing in new, refreshed and first-in-airport brands to airports across the network. Completion of the reset is expected to further boost non-aero revenue contribution.

4. The group reiterated that the OA is expected to be finalised and executed in somewhere in 2024. 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 and potentially a reduction in user fees.

Outlook. We expect business and leisure air travel to continue to recover throughout FY24. According to our in-house projection, tourist arrivals in Malaysia are expected to jump 35% to 27m (consistent with Tourism Malaysia’s projection to return to pre- pandemic levels) in FY24 from an estimated 20m a year ago (see Exhibit 1). A key driver is Chinese tourists that had historically contributed to an estimated 12% of total tourist arrivals in Malaysia. Furthermore, tourist arrivals is expected to be boosted by the 30-day visa-free regime for Chinese and Indian visitors to Malaysia starting from Dec 2023 and China, allowing Malaysian inbound visitors 15 visa-free days between 1 Dec 2023 and 30 Nov 2024.

This should underpin growth in AIRPORT’s passenger throughput demand in 2024. We expect traffic trajectory to grow in subsequent months as airlines continue to re-activate 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. 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, meeting the surge in travel demand after Japan reopened its borders to international travellers. AirAsia Group meanwhile is focusing on its medium-haul operations and had increased its Malaysia AirAsia X flights to 44 times weekly across 10 routes from Nov 2022.

Forecasts. We maintain our FY24F forecasts and introduce our FY25F numbers based on a passenger throughput assumption of 131m.

Valuations.We lift our TP by 14% to RM8.00 (from RM7.00) as we roll forward our valuation base year to FY25F (from FY24F). Our TP is based on 22xFY24F EPS or at a 40% discount to closest peer Airport of Thailanddue 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).

Investment case. 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 - 1 Mar 2024

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