CAPITALA: Buy-on-weakness

A tourism play. We remain upbeat on the tourism recovery trend, which has been identified as one of HLIB’s key themes for 2H24. We expect a continued recovery in tourist arrivals to Malaysia, driven by two key factors: (i) visa-free travel for Chinese and Indian nationals and (ii) the reinstatement of global flight capacity. The primary beneficiaries of this trend will be aviation players, with CapA positioned as the prime proxy. Notably, the strong rebound in CapA’s aviation segment has returned the group to profitability in 1QFY24, achieving a core PAT of RM126.6m — its first profitable quarter since the pandemic. Passenger numbers have surged by 79% YoY, with yields improving as reflected in a 20.2% increase in Fares/RPK.

We anticipate continued earnings improvement for CapA in the coming quarters, driven by a sustained recovery in tourist arrivals and increased capacity. Tourism Malaysia has set an ambitious target of 27.3m tourist arrivals for 2024, reflecting a 36% YoY increase and signalling a return to pre-pandemic levels (2019: 26.1m; 4M24: 7.6m). To capitalize on this trend, CapA plans to expand its fleet from the current 187 aircraft to 221 by the end of 2024.

Beneficiaries of strong ringgit. The recent sharp appreciation of the ringgit against the USD is expected to benefit CapA, as nearly half of its operating costs and borrowings are in USD. With the ringgit's upward momentum amid the US Fed's rate cut cycle, this trend should bolster CapA’s profitability going forward.

PN17 status. CapA is guiding for the completion of its PN17 restructuring plan in 4QFY24, with the disposal of Aviation segment to AAX (or AAG). Subsequently, CapA is planning to acquire back GTR (ground handling services) from AAG and group the business unit under its Aviation Services segment, which will be similar to SG listed SATS business model. Should these plans materialize on schedule and lead to the group's exit from PN17 status, it could serve as a significant catalyst for share price appreciation by unlocking access to a broader range of investors.

Uptick bias. CAPITALA is poised for a further rebound, with indicators showing an upward bias. A successful breakout above RM0.80 will spur the price toward RM0.85-0.88-0.91. Cut loss at RM0.70.

Collection range: RM0.73-0.75-0.77

Upside targets: RM0.85-0.88-0.91

Cut loss: RM0.70

Source: Hong Leong Investment Bank Research - 13 Aug 2024