Bursa Malaysia (KLSE) Stock Investment Portal

We reiterate our OVERWEIGHT stance on the sector, premised on AIRASIA’s special dividend of 90.0 sen. While we might have downgraded AIRPORT from OP to MP with an unchanged TP of RM8.70, we believe that there could be more potential re-rating catalysts in Oct-19 upon the release of the third consultation paper on the implementation of RAB from MAVCOM. We opine that the third consultation paper is critical with at least 80-90% of its details finalised as it would pave the way for the implementation of RAB in Jan-20, and we might look to review our valuation methodology on AIRPORT upon the release of the third consultation paper as it could be a major re-rating catalyst for AIRPORT.

Mixed fortunes in 1QCY19. Over 1QCY19, share price for AIRASIA registered negative return of 1.8% while AIRPORT registered positive return of 11.2%. We believe that the weakness in AIRASIA’s share price despite the announcement of special dividend of 90.0 sen is due to the challenging operating environment arising from high fuel cost, and lower yields as a result of AIRASIA’s strategy to grab market share with their expanded capacity. As for AIRPORT, we believe that it is mainly due to MAVCOM’s second consultation paper, which is deemed to be favourable for AIRPORT and their future expansion plans upon the implementation of RAB framework. In 1QCY19, both AIRASIA and AIRPORT reported results that were in-line – a sequential improvement over the misses reported by both in the previous quarter.

Healthy domestic traffic underpins steady growth. AIRPORT continues to register steady passenger traffic (including ISG) growth of 3.7%, YoY-Ytd for 5M19 (+4.1% for Malaysian operation and +2.2% for Turkey operation YoY-Ytd), which we believe is on track to meet our target of 4.3%. The steady growth for its Malaysian operations was mainly backed by domestic traffic, which registered growth of 7.6%, YoY-Ytd.

Industry updates. AIRASIA’s special dividend of 90.0 sen was a positive surprise for us, reflecting management’s asset light approach as they are undertaking their digitalisation journey and expansion of new businesses that leverage on technology, i.e. Teleport, BigPay and AirAsia.com. Nonetheless, we opine that its existing business, i.e. air travel to be cruising through cloudy skies due to higher operating cost environment where higher jet fuel cost currently averages at USD78.7/bbl versus its low of USD66.6/bbl.

As for AIRPORT, the future looks better upon the release of the second consultation paper on RAB framework, whereby MAVCOM is considering to benchmark its Return of Asset based on a WACC of 10.88%, and a preliminary approved CAPEX of RM5.0b under the first review period (RP1) from year 2020-2022, charting AIRPORT’s future growth. While we are positive with MAVCOM in engaging every stakeholder, we believe that the hurdle in AIRPORT’s CAPEX plans could be from a major client having a different preference of airports compared to KLIA2. Hence, we would not be surprised if AIRPORT’s approved CAPEX of RM5.0b were reduced after the review of MAVCOM’s second consultation paper. The third consultation paper that is expected by Oct-19 would be critical as it would set the tone for the future development of airports and its PSC charges framework.

As for the implementation of departure levy of RM40/20 per pax for International/ASEAN departure that is slated to take place in September, we do not think that it would have a significant impact to passenger traffic. However, we believe that it might impede MAVCOM’s effort in setting PSC charges through the implementation of RAB for the aviation industry, especially when the departure levy could be utilised for future airport development in rural areas. Currently, the departure levy was aimed at encouraging tourism but with no indication of the use of funds.

Maintain OVERWEIGHT. We upgraded the sector from NEUTRAL to OVERWEIGHT post the May-19 reporting season due to the special dividend from AIRASIA and also MAVCOM’s second consultation paper, which shed more light on the implementation of RAB framework in Jan-20. While we are maintaining our OUTPERFORM call on AIRASIA with an unchanged Target Price of RM2.20 based on 9x PER on its FY20E EPS (excluding special dividend), we downgrade AIRPORT from OUTPERFORM to MARKET PERFORM with an unchanged Target Price of RM8.70 that is based on 1.72x PBV based on its FY20E BVPS. We believe that the next potential re-rating catalyst for AIRPORT could lie in the third consultation paper that is to be released in Oct-19, which would pave way for the implementation of RAB in Jan-20 which would prompt us to review our Target Price for AIRPORT with an upward bias as we look to review our valuation methodology.

Source: Kenanga Research - 3 Jul 2019