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This article first appeared in The Edge Financial Daily on June 12, 2019

Malaysia Airports Holdings Bhd
(June 11, RM7.91)
Maintain buy with an unchanged target price (TP) of RM8.80:
The May 2019 passenger traffic for Malaysia Airports Holdings Bhd (MAHB) airports (excluding Istanbul Sabiha Gokcen International Airport [SGIA]) increased by 2.2% year-on-year (y-o-y) to 7.9 million passengers. On a cumulative basis, the passenger traffic for airports in Malaysia in the first five months of 2019 posted a 4.1% y-o-y increase to reach 42 million, making up 41% of our FY19 passenger traffic growth estimates of 102.5 million.

 

For SGIA, international passenger traffic soared 13% y-o-y to reach one million for the same month, offsetting the 8% y-o-y decline in domestic passenger traffic to 1.7 million. This brings SGIA’s overall passenger growth for the first five months of 2019 to 18.7% y-o-y after hitting 5.2 million passengers.

The catalyst for the international sector was the ongoing route restructuring by carriers since late 2018 such as Pegasus Airlines to expand into more international routes. The latest route addition in May 2019 included destinations to Basra while Manchester and Venice will be introduced later in July 2019. Overall, MAHB’s total cumulative passenger traffic (including ISGA) grew by 3.7% y-o-y to 55.7 million for the first five months of 2019.

Domestic traffic for airports in Malaysia in May 2019 continued its upward trend, increasing by 3.5% y-o-y to 3.8 million passengers despite the almost full Ramadhan fasting month which began on May 6. The effects of lesser travel during the fasting period was outweighed by the school holidays which took place towards the end of May, not too far away from the Hari Raya Aidilfitri holiday season.

As a result, the y-o-y growth seen in domestic traffic extended to its seventh consecutive month. The bulk of the growth was attributable to the 5.1% y-o-y jump in domestic traffic at airports ex-Kuala Lumpur International Airport. We attribute the growth to the shift in airlines capacity from the international to the domestic sector. International passenger traffic in May 2019 for Malaysian operations increased by 1% y-o-y to reach four million passengers.

While we note that the international passenger traffic was the lowest in seven months, international traffic was actually the highest ever on a five-month cumulative basis at 21.6 million. The ratio of international to domestic passengers for Malaysian operations for the first five months of 2019 remained at 51:49 which bodes well for MAHB as the passenger service charge (PSC) for international passengers is higher compared with domestic passengers. MAHB targets to bring in 10 new airlines to Malaysia, especially to its five main airports. This will maintain the stronger mix of international passengers which bodes well for MAHB in terms of the higher PSC collected; RM35 for non-Asean and RM73 for beyond Asean.

We opine that the current momentum of passenger traffic will continue to provide a strong base for incremental revenue generation going forward. This will be supported by accommodative visa policies in Malaysia for tourists from China and India which will temper the pressure from the impending international departure levy. Other growth factors would include direct connectivity seen from international airlines flight straight to locations such as Langkawi.

As such, we strongly believe that MAHB passenger numbers can surpass the 100 million mark in 2019, while maintaining a relatively conservative growth rate of 3.5% which translates into 102.5 million passengers. All factors considered, we are maintaining our “buy” call on MAHB with an unchanged TP of RM8.80 per share based on our discounted cash flow valuation. Risks to our call include: i) adverse revision towards the user fee paid to the government; and ii) lower-than-expected returns from under the new Regulated Asset Base framework. — MIDF Research, June 11

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