Despite 9MFY20 coming below expectations, we believe the recent vaccine discoveries would buoy valuations of the group as the market gradually pivot towards a Covid-19 recovery theme. Its Cambodia airports which were among the hardest hit by the pandemic would naturally be rebound favourites – even more so than other airports given that passenger traffic at Cambodia was rising at double digits pre-pandemic. Thus, maintain OP with higher TP of RM1.25 (from RM1.05).

Below expectations. 3QFY20 core net loss (CNL) of RM30.7m dragged 9MFY20 down further to a CNL of RM50.7m, missing both our and consensus profit estimates of RM2.4m and RM10.2m, respectively. We had earlier projected 3QFY20 to see strong sequential rebounds for all divisions (Construction, Cranes and Airport). Nonetheless, meagre rebounds were only seen at its crane and airport divisions while construction actually performed worse – which explains the negative deviation against expectations. No dividends as expected.

QoQ, 3QFY20 actually plunged deeper into a loss of RM30.7m (from CNL of RM23.1m) despite emerging from a MCO-laden quarter in 2QFY20. The weaker performance is due to: (i) higher depreciation charges (+119%) arising mainly from their construction division, and (ii) higher tax of RM9.4m vs RM4m seen in 2QFY20 due to non-tax deductible expenses and under-provision of tax in previous years.

YoY, 9MFY20 sank into the red to a CNL of RM50.7m mainly due to the Covid-19 impact resulting in weaker associate contributions (-96%) from its 21%-owned Cambodian airports which saw passenger traffic plunging to 2.05m (-77%). Its construction division which registered losses before tax of c.RM75m vs 9MFY19 loss of RM41m (after accounting for eliminations) also contributed to the overall decline.

A ray of light emerges. The recent positive development in vaccines suggests that this is the beginning to a recovery upcycle for the travel industry. Nonetheless, we think that actual passenger traffic for FY21 will remain weak as it will take time for vaccines to be distributed before borders gradually re-open. We only foresee a significant recovery of airport passenger traffic in FY22. Meanwhile, the group’s outstanding order-book shrunk to RM1.1b (<1x cover) from weak construction replenishments.

Earnings review. We revise FY20E earnings down to a CNL of RM71m (from CNP of RM2.4m) and FY21E’ down to a CNP of RM26.2m (from RM60m). This is after factoring: (i) larger loss-before- tax of RM111.5m/RM32.5m for its construction division (from RM45.5m/RM21.5m), and (ii) lower FY20/21E passenger traffic of 2.15m/3.5m (from 2.5m/4.0m) for its Cambodian airports.

Look beyond. Despite the slash in earnings, the cheap valuations (from Cambodian Airports) coupled with the recovery outlook narrative provide the group with a strong re-rating catalysts. Hence, we reiterate OUTPERFORM with a higher SoP-based TP of RM1.25 (from  RM1.05) after (i) imputing in stronger passenger traffic growth assumptions in our DCF at their Sihanoukville and Siam Reap airports from FY22 onwards and (ii) revising Favco’s (crane division) PER valuations up to 11x from 8x as a pick-up in construction activities looms ahead.

Source: Kenanga Research - 30 Nov 2020