We maintain our NEUTRAL view on the sector. We expect the demand for business and leisure air travel to continue to recover throughout CY24, which is consistent with Tourism Malaysia’s projection of tourist arrivals to return to pre-pandemic levels of 27m in Malaysia, up 35% from 20m in CY23. We see a sustained recovery in passenger throughput at AIRPORT (MP; TP: RM7.00) and passengers carried at CAPITALA (MP; TP: RM0.84). However, each player has its own unique set of issues. For AIRPORT, a tariff hike pegged to CPI recently proposed by Malaysia Aviation Commission (MAVCOM) may not be sufficient for AIRPORT to generate enough cash flows for capex purposes, particularly for airport expansion and maintenance. Meanwhile, the clock is ticking on a more viable and holistic regularisation plan to lift CAPITALA out of its Practice Note 17 (PN17) status. We do not have any pick for the sector.

Tourist arrivals underpin passenger throughput growth in CY24. We expect business and leisure air travel to continue to recover throughout CY24. According to our in-house projection, tourist arrivals in Malaysia is expected to jump 35% to 27m (consistent with Tourism Malaysia’s projection to return to pre-pandemic levels) in CY24 from an estimated 20m a year ago (see Exhibit 1). A key driver is Chinese tourists that had historically contributed to an estimated 12% of total tourist arrivals in Malaysia. Furthermore, tourist arrivals is expected to be boosted by the 30-day visa-free regime for Chinese and Indian visitors to Malaysia starting from Dec 2023 and China allowing Malaysian inbound visitors 15 visa-free days between 1 Dec CY23 and 30 Nov CY24. This should underpin growth in AIRPORT’S passenger throughput and CAPITALA’s passenger demand in CY24.

Further volume improvement for AIRPORT and CAPITALA in CY24. We project AIRPORT’s system-wide passenger throughput to rise by 7% to 131m in CY24. Amplifying traffic growth trajectory is aircraft movements that are pointing towards increased medium and long-haul flights to Perth, Sydney and Auckland, Southeast Asia and South Asia destinations. KL International Airport saw the return of Kuwait Airways after a seven-year hiatus, while two other foreign carriers i.e. KLM Royal Dutch Airlines and All Nippon Airways, will resume non-stop flight operations to Amsterdam and Tokyo, respectively, after temporarily ceasing operations due to the COVID-19 pandemic. In addition, Malaysia Airlines has increased its flight frequency to Tokyo. AirAsia Group meanwhile is focusing on its medium-haul operations by increasing its Malaysia AirAsia X flights to 44 weekly across 10 routes from November 2022.

We see a similar trend for CAPITALA’s passenger demand in CY24, paving the way for its system-wide revenue seat km (RPK) to grow 20% to an estimated 70b in CY24, after recovering by an estimated 24b to 58b in FY23 based on our forecasts. The group reiterated that the passenger throughput recovery is gaining traction. It is targeting to reactivate 187 aircrafts by 4QFY23 with 161 aircrafts available for operation, and its operating capacity to reach 74% of pre-COVID level, leveraging the high travel season and the newly established visa-free travel between China and Malaysia starting 1 Dec 2023.

Pegging airport tariffs to CPI may not be sufficient to raise enough funds for capex. Meanwhile, in a recent consultation paper published by MAVCOM, the proposal to raise airport tariffs based on CPI may not be sufficient for AIRPORT to generate enough cash flows for capex purposes, particularly for airport expansion and maintenance. While MAVCOM also proposes a mechanism for AIRPORT to recoup losses incurred during Regulatory Period 1 (RP1) in Regulatory Period 2 (RP2), we are concerned about AIRPORT’s cash flows over RP1.

CAPITALA’s regularisation plans to exit PN17 in the works. The group plans to divest its aviation group to AirAsia X in exchange for shares which will subsequently be distributed back to its shareholders. While we continue to like CAPITALA for being a beneficiary of the recovery in air travel as the pandemic comes to an end, we are mindful of it still being under the PN17 status. We do not have any pick for the sector.

Source: Kenanga Research - 26 Dec 2023