HLIB Research keeps neutral call on aviation sector; expects 4.5% passenger growth in 2020

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KUALA LUMPUR (Jan 15): Hong Leong Investment Bank (HLIB) Research has maintained its 'neutral' call on the aviation sector given the moderating domestic consumer sentiments and current government policy uncertainty.

In a note today, HLIB said it noted that domestic-based airlines have been adjusting capacities towards the domestic segment due to weakening consumer sentiment and competitive international segments.

As such, domestic segments generated lower ancillary income to airlines (AirAsia Group Bhd, Malaysia Airlines and Malindo) as well as lower airport charges and commercial revenue to Malaysia Airports Holdings Bhd (MAHB).

It said it expects passenger growth of 4.5% year-on-year (y-o-y) for 2020 (from 3.5% y-o-y).

Furthermore, the research house said the details of the new Operating Agreement (OA) and Regulatory Asset Base (RAB) are still being finalised between MAHB and the Ministry of Transport (MoT), Ministry of Finance and Malaysian Aviation Commission (Mavcom), which will be merged with Civil Aviation Authority of Malaysia (CAAM).

"However, recent MoT's comments on preference towards alternatives of RAB structure and public private partnerships for Malaysia's airports development as well as cabinet approval of the integration of CAAM and Mavcom (unwind), has heightened the uncertainties of RAB implementation.

"Furthermore, the implemented departure levy, ongoing restructuring of Malaysia Airlines and VMY2020 (Visit Malaysia Year 2020) are seen as an impending block to RAB implementation," it added.

Moreover, the research house said it believes the aviation sector will benefit from the planned initiatives for VMY2020, partially addressing the concerns on deteriorating Malaysia and regional sentiments.

HLIB said VMY2020 is expected to increase tourist arrivals into Malaysia as well as domestic travel, and the government allocated RM1.1 billion under Budget 2020 for VMY2020.

Based on VMY2007 and VMY2014, the research house said visitor growths were 19.5% y-o-y and 6.7% y-o-y respectively, while MAHB international passenger movement growths were 10.5% y-o-y and 4.9% y-o-y respectively.

HLIB said jet fuel price has been trading at an average of US$78 per barrel (/bbl) in 2019, in tandem with Brent oil trading at US$64/bbl.

Despite the recent intense Middle East situation, the research house said it expects oil price to average at US$60/bbl in 2020 due to current inventory built up globally, and jet fuel to trade at US$70-75/bbl.

"Maintain 'hold' recommendation on MAHB with unchanged discounted cash flow to equity (DCFE)-derived target price (TP) of RM7.80. There are still uncertainties with RAB framework as well as its implementation," it said.

Furthermore, HLIB said the proposed RAB and passenger service charge may also affect the impending Malaysia Airlines restructuring exercise and success of VMY2020 campaign.

"Maintain 'hold' recommendation on AirAsia with unchanged TP of RM1.62, based on 20% discount to SOP of RM2.02. We remain positive on AirAsia's strategic growth in leveraging into digitalization to enhance the group's earnings. However, the group face immediate risks of market slowdown, competition as well as regulations," it added.

At 10.14am, MAHB shares added 1 sen to RM7.01 for a market capitalisation of RM11.63 billion, while AirAsia's share price rose 1 sen to RM1.69, valuing it at RM5.65 billion.