KUALA LUMPUR (Jan 6): Kenanga IB Research has maintained its “Neutral” rating on the Aviation sector and said it likes Malaysia Airports Holdings Bhd (MAHB) as an attractive proxy to the propensity for air travel due to rising per capita income.

In a sector update Jan 4, the research house said MAHB is well-entrenched because of its (i) monopolistic position as an airport operator in Malaysia, while (ii) earnings are protected from downside in the aeronautical segment under the operating agreements.

However, it said AirAsia Group Bhd is expected to face near-term tough operating environment on intense competition, and higher operating costs due to accounting treatment for aircrafts under sales and leaseback arrangements.

Specifically, it said AirAsia’s 3QFY19 earnings was dragged down by cost per available seat kilometre (+11%) which rose faster than revenue per available seat kilometre (+1%) due to higher staff costs, provisions for maintenance and overhaul (+>100%), user charges and other operating expenses, due to the increase in operations, as well as the impact of adopting MFRS16.

“AirAsia’s target price (TP) is RM1.70 based on 10x FY20E EPS, at a discount to average forward PER of 11x of global peers to reflect its relatively smaller market capitalisation.

“TP for MAHB (Outperform) is RM9.90 based on 22x FY20E EPS, which is at a 20% discount to regional peers’ average to reflect its relatively smaller market capitalisation.

“Reiterate Neutral on sector,” it said.