We are expecting airlines carrier including AirAsia to face tougher operating conditions following the COVID-19 pandemic due to the restrictions and collapse in air travel. For the sector we prefer Malaysia Airport Holdings Berhad (MAHB), being a monopolistic airport operator in the country. While a prolonged coronavirus pandemic could impact MAHB’s earnings, the experience from SARS indicates that the impact to passenger volume will see a recovery soon after. We believe the recent sell-down presents an opportunity to buy into MAHB. AirAsia is expected to face losses on low yields, weaker loads and higher operating costs due to accounting treatment for aircrafts under sales and leaseback arrangements. In the meantime, the sector could be further de-rated by longer-than expected recovery and remain mired with losses. We maintain Underperform on AirAsia with a TP of RM0.60 based on unchanged 0.5x FY20E BVPS. TP for MAHB (OUTPERFORM) is RM5.70 based on 19x FY21E EPS. Reiterate Neutral on sector.

A weak 4QFY19. The recently reported 4QFY19 results for both AirAsia Group and Malaysia Airports Holdings came in below expectations. Malaysia Airports Holdings delivered FY19 earnings which came in below expectations due to weaker-than-expected 4QFY19 results due to losses at International Sabiha Gokcen and higher operating cost. However, AirAsia’s 4QFY19 losses narrowed due to RASK rising faster by 9% compared to a lower CASK (-1.3%) underpinned by better average fare (+11%) and lower fuel price (- 9%). This was largely due to: (i) better average fare (+11%), (ii) narrower losses at India and Indonesia, and (iii) AirAsia Philippines which turned profitable.

AirAsia temporarily hibernating all international and domestic flights. We are expecting more losses ahead following the COVID-19 pandemic which is taking its toll on airlines operators including AirAsia due to the restrictions and collapse in air travel. AirAsia Malaysia will temporarily suspend all international and domestic flights from Mar 29 to April 25, while AirAsia Philippines will be suspended from Marc 20 to April 14. Additionally, AirAsia Indonesia will see a sharp reduction in frequency in its international flights. Similarly, AirAsia Thailand will halt its international flights from March 22 to April 25. As such, over the medium term, we expect AirAsia to face an extremely tough operating environment derailed by widespread travel disruptions due to the COVID-19, to be hit by both lower ticket prices and load factor which are likely to drag down yields, and hence a very challenging earnings outlook ahead. With a net cash of RM2.2b as at 31 December 2019, we expect AirAsia to be able to weather through this COVID-19 crisis and hopefully without deteriorating its balance sheet. Nevertheless, in the meantime, the sector could be further de-rated by longer-than-expected recovery and mired with losses. Elsewhere, we expect maintenance cost to remain high due to accounting treatment for aircrafts under sales and leaseback arrangements.

RAB framework is still on the cards; sector has been de-rated on the back of COVID-19. Following the introduction by the Malaysian government on the ‘Movement Control Order’ (MCO) on the nation for two weeks effective 18 March 2020 to 31 March 2020 (it has since been extended to April 14), prohibiting foreign arrivals into the country and also Malaysian nationals from leaving the country, there were many flights cancellations which could impact MAHB passenger movements. For example, Malaysia Airlines will significantly reduce its overall network during the MCO and have suspended flights include those to India and the Philippines on top of previously suspended services to Saudi Arabia, South Korea, as well as Beijing Daxing. Management is still in talks with finance ministry officials on the funding mechanism of the proposed rebates for MAHB’s rental premises and aircraft landing and parking charges. We highlight that management is not ruling out Regulated Asset Base (RAB) and discussion with the relevant authorities is still on-going. We have yet to impute RAB into our earnings model. Recall, Malaysia Aviation Commission (MAVCOM) proposed the RAB model framework-led tariff on aeronautical charges or Passenger Service Charge (PSC) for MAHB based on a WACC of 10.88%. Under the RAB, capex of RM4b (previously RM5b), regulated revenue per pax is expected to increase to RM43.50 (from currently average RM34.50 per pax) for regulatory period of year 2020 till end 2022.

Reiterate Neutral. On picks, we like MAHB as a monopolistic airport operator in the country. While a prolonged coronavirus pandemic could impact MAHB’s earnings, judging by the experience from SARS indicates that the impact to passenger volume saw a recovery soon after. TP for MAHB is RM5.70 based on 19x FY21E EPS (-1.0SD below historical forward mean). Reiterate Outperform on Malaysia Airport. We believe the recent sell-down presents an opportunity to buy this high beta stock.

Source: Kenanga Research - 3 Apr 2020