This article first appeared in Capital, The Edge Malaysia Weekly on January 16, 2023 - January 22, 2023

MAYBANK INVESTMENT BANK RESEARCH (JAN 9): After a horrible three years, we believe that things are finally looking up for the Malaysian aviation industry. We expect passenger traffic to continue recovering, jet fuel prices to ease and airfares to remain high. In addition, the huge Chinese outbound tourism market reopened on Sunday (Jan 8).

In a “blue sky” scenario where the two million Chinese visitors who flew to Malaysia in 2019 return in 2024, our 2024 earnings estimates for Malaysia Airports Holdings Bhd (MAHB) and Capital A Bhd could be lifted by about RM100 million each. Our earnings estimates assume 1.3 million Chinese visitors flying into Malaysia in 2024. To be sure, we do not expect many Chinese visitors to return to Malaysia in 2023 for these reasons: (i) China battling its Omicron wave; (ii) the requirement for negative PCR tests before returning to China; and (iii) Malaysia AirAsia not having returned all its aircraft to service yet.

We remain “positive” on the Malaysian aviation industry, as we expect: (i) passenger traffic to continue recovering as more aircraft are returned to service; (ii) jet fuel prices to ease because of lower Brent crude oil prices and a narrowing jet fuel-Brent crude oil crack spread; and (iii) still-high airfares due to fewer aircraft operated by airlines.

The above notwithstanding, the Malaysian aviation sector is not without challenges. The main challenge is returning aircraft to service after being idled during the Covid-19 pandemic. There are currently backlogs at maintenance, repair and operations centres around the world due to a surge in demand for aircraft to be returned to service, coupled with a lack of labour and parts. As alluded to above, only 60% of Malaysia AirAsia’s fleet has been returned to service. If the remaining 40% is slow to be returned to service, this poses a downside risk to not just our estimates for Capital A, but MAHB as well.

We expect MAHB (TP: RM7.31, Buy) to have broken even in 4Q2022 and Capital A (TP: 90 sen, Buy) to break even in 3Q2023. Key events to watch out for this year are MAHB’s new operating agreement and the lifting of Capital A’s Practice Note 17 designation.

Target price: RM11.77 BUY

MIDF RESEARCH (JAN 10): Petronas Chemicals Group (PCG) and Sabah, through its wholly-owned company SMJ Sdn Bhd (SMJ), have signed a heads of agreement for the acquisition of a 25% equity interest in Petronas Chemicals Fertiliser Sabah Sdn Bhd (PCFS). The acquisition of equity interests in PCFS will give Sabah a greater revenue share in the oil and gas industry in the state. This is in addition to the recent acquisition of selected downstream gas pipeline assets and the supply of natural gas contracts by Sabah Energy Corp Sdn Bhd (SEC), which makes SEC the largest domestic supplier and transporter of natural gas in Sabah. These acquisitions signify the increased participation of Sabah GLCs in the local oil and gas industry.

Considering that the divestment is in line with PCG’s plan of expanding its strategic partnership in Sabah, we make no changes to our earnings estimates and maintain our target price of RM11.77, pegging a PER of 11.4 times to a revised EPS 2023 of 103.6 sen. The PER is derived from the chemical and materials industry’s five-year average.

Target price: RM4.54 HOLD

HONG LEONG INVESTMENT BANK RESEARCH (JAN 10): PMETAL’s 4Q22 results are tentatively scheduled for release at the end of February. We expect core earnings for the quarter to come in within the range of RM305 million to RM355 million (-3% to +12% q-o-q, +7-24% y-o-y) in 4Q22, barring any unforeseen swings in the cost structure. This is estimated from LME aluminium spot prices, which averaged US$2,352 per tonne in 4Q22 (versus the average of US$2,357 per tonne in 3Q22 and US$2,760 per tonne in 4Q21).

While the prospects of aluminium as a metal remain challenging in the near term due to recession woes and the general decline in the global real estate markets due to the high interest rate environment, we continue to see bright spots in aluminium in the mid-long term, as it serves as the preferred metal for the ultra-fast growing electric vehicle and solar PV sectors. We see PMETAL as an indirect beneficiary of the global decarbonisation movement and increasing ESG policies across the world. However, we highlight that PMETAL may still register mediocre quarters ahead due to subdued aluminium spot prices.

Target price: RM14.10 OUTPERFORM

KENANGA RESEARCH (JAN 9): In October 2022, fire tariffs were further reduced by 15% as part of Bank Negara Malaysia’s efforts to liberalise the industry. As the segment makes up 40% of LPI’s gross premiums and 60% to 70% of underwriting surplus before management expense, heightened competition here could be sensitive to group earnings. Against this, the group says the expansion of its agency force could sustain its leading presence in the market. Still, the group continues to benefit from referrals from Public Bank, although we believe housing loans are likely to see slower growth at higher interest rates.

Our TP is based on an unchanged 2.5 times FY23F PBV, based on a 25% premium against the historical forward PBV of industry peers. At current price levels, we believe there are buying opportunities, as LPI’s premium remains justified, based on its better dividend prospects and earnings, notwithstanding support from its affiliation with Public Bank. While there is no guided impact with regard to MFRS 17 on group earnings, investors may be more inclined towards LPI as opposed to its peers that are expecting earnings erosion.

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