This article first appeared in Capital, The Edge Malaysia Weekly on April 11, 2022 - April 17, 2022

Target price: RM7.60 ADD

CGS-CIMB (APRIL 5): Our earlier traffic forecasts for Malaysia were based on the expectation that the country’s borders would reopen by mid-2022, but Malaysia decided to reopen from April 1 instead. With more international travel, we expect higher domestic travel, due to interstate connectivity with Malaysia’s international airports. As a result, we raise our 2022 domestic traffic forecast by 21% (to 85% from a pre-pandemic base of 70% in 2019) and our 2022 international traffic forecast by 60% (to 40% from a pre-pandemic base of 25%).

Our new forecasts are reasonable because in February, Malaysia’s domestic traffic had already reached 69% of the 2019 base, and we expect a new airline, MYAirline, to commence operations in August. Meanwhile, AirAsia and the Malaysia Aviation Group (MAG) said they plan to restore 90% and 70% of their pre-Covid-19 passenger capacity respectively by end-2022, which we think will be largely international in nature, given that they have both concentrated on domestic capacity restoration in the past six months.

Domestic and international traffic recovery may also come from Malindo Air and AirAsia X, both of which sharply curtailed their fleet during the pandemic. Malindo may transfer back to Malaysia some of the 24 737s that were transferred to Indonesia in the past two years, while AAX may restore some of its medium-haul passenger services if cargo yields can continue to pay for the costs of its flights, given the high cargo yields currently.

At Istanbul Sabiha Gokcen (ISG), we raise our 2022 international passenger traffic forecast by 18% (to 100% from a pre-Covid-19 base of 85%). We have already taken into account that Russia and Ukraine flights from ISG have been suspended. These contributed 9% to 10% of ISG passenger traffic in 2019. Our expectations of a strong recovery in international passenger volumes in Malaysia and at ISG are very positive for Malaysia Airports Holdings Bhd as the benchmark international passenger service charges (PSCs) in Malaysia are five to seven times higher than the benchmark for domestic PSCs, while the net international PSC at ISG is five times higher than the net domestic PSC.

Target price: RM9.30 HOLD

MAYBANK IB (APRIL 5): Tenaga, via its wholly-owned UK-based renewable energy (RE) subsidiary Vantage RE Ltd, has acquired 97.3mw of UK onshore wind farms for £145.9 million (RM805 million) from funds advised by Capital Dynamics, an independent asset management firm. Details are limited.

The acquired portfolio comprises 11 UK sites developed under either the feed-in tariff or Renewable Obligation Certificate subsidy regimes, thus providing some degree of revenue stability. The acquisition raises Vantage’s wind capacity from 433mw to 530mw, and Tenaga’s gross RE capacity from 3,479mw to 3,576mw. Based on latest operating logs, 1Q22 Peninsular Malaysia generation was up about 1.8% year on year and down about 2.4% quarter on quarter.

In our view, electricity generation is back at the pre-pandemic run rate. Meanwhile, coal prices have continued to climb, with the Newcastle spot averaging 35% higher q-o-q in 1Q22. The under-recovery of Tenaga’s generation costs will thus continue. With the Industry Fund likely close to depleted, the government’s options to avoid fully passing-through a surcharge are increasingly limited. Our earnings forecasts and target price of RM9.30 are unchanged.

Target price: RM16.45 OUTPERFORM

KENANGA RESEARCH (APRIL 6): We anticipate financiers to be overall beneficiaries of the ongoing economic recovery as consumer spending resumes, demonstrated by the group’s recent quarter’s expansion. On a year-on-year basis, total transactions increased 13%, indicating that perhaps smaller-ticket items are still in favour. Although repayment issues may be a concern in the near term, we believe this should normalise in the subsequent periods as income and cash flow return to the pockets of consumers.

Although FY22 ended in disappointment, we believe the additional provisions made by AEON Credit could be written back in the following period on our stance that economic recovery will rejuvenate income and cash flow. As such, we reduce our overall impairment estimates for FY23, resulting in a 5% increase in earnings. We also introduce our FY24 numbers.

We maintain our “outperform” call on the stock, with a slightly lower target price of RM16.45 (from RM16.60). Though we raise our FY23 earnings, we narrow our applied PER of 10.6 times to 10 times as we believe investors may be more cautious on the stock’s near-term sustainability amid the impairment shock seen in the recent results.

Target price: RM4.45 BUY

UOB KAY HIAN (APRIL 6): In a recent meeting, management guided for a directional change for Axiata — aiming to grow the business post the potential merger of Digi.Com and Celcom. Key drivers are: (a) consolidation of Link Net in Indonesia; (b) the enterprise business that accounts for 20% of group revenue; (c) edotco’s regional tower expansion — organic and inorganic; and (d) the growing digital businesses. In addition, Axiata is maintaining its target of achieving a dividend payout of 20 sen per share by 2024, with Celcom driving a huge chunk of the cash flow.

We project a three-year earnings CAGR of 8%, suggesting room for upside as Axiata focuses on growing its regional businesses. Axiata partnered with RHB to bid for a digital banking licence (DBL) in Malaysia. We expect the announcement of DBL winners sometime in mid-2022. Our current valuation has not imputed the potential DBL win. Our back-of-the-envelope calculation suggests that winning the DBL could potentially add RM500 million to its market capitalisation (or 1.5%) based on five times price/sales of Axiata’s 60% stake in the Axiata-RHB consortium.

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