We maintain NEUTRAL on the sector. The earnings delivery (against our expectations) by the sector was steady in the recently concluded 2QCY24 results season, underpinned by a strong recovery in the demand for air travel and yields. We expect the demand for business and leisure air travel to continue to recover throughout CY24. However, each player has its own unique set of circumstances. For AIRPORT (ACCEPT OFFER; TP: RM11.00), the poser is if the proposed privatisation by a consortium at RM11.00/share will be accepted by its minority shareholders once a formal offer is made. Meanwhile, while CAPITALA (MP; TP: RM0.78) has been able to fill up seats in its planes, there is room to boost yields to ensure profitability after accounting for depreciation, aircraft leasing charges and finance cost. We do not have any pick for the sector.

A mixed set of 2QCY24 results. The earnings delivery by the sector in the recently-concluded 2QCY24 saw AIRPORT beating our forecast but CAPITALA missed (see Page 2). CAPITALA’s 1HFY24 was hampered by air travel and fell short of expectations. AIRPORT was buoyed by high-yielding international passenger throughput. Total network of airports’ passenger traffic continued to gain traction in 1HCY24, recording 65m (+16% YoY) which made up 49% of our full-year forecast of 131m (vs. 119m in 2023). As an indication that traffic recovery has continued to show buoyancy, 1HCY24 passenger movements reached 95% of CY19 level, underscoring the underlying demand for air travel. Its Malaysia operation’s total passenger movements for 1HCY24 grew by 16% and reached 87.9% of 1H19 levels, boosted by international passengers recording 23.6m (+16%) which more than offset lower domestic passengers (-1%). Similarly, its Türkiye operation namely Istanbul SGIA’s traffic continued to exhibit positive momentum QoQ in 2QFY24.

Tourist arrivals to underpin passenger throughput growth in CY24. We project tourist arrivals of 27m in CY24, up 35% from 20m in CY23 and surpassing the 26.1m in CY19 before the pandemic, backed by higher demand for both business and leisure air travel. The number is consistent with Tourism Malaysia’s target of 27.3m (see Exhibit 1). A key driver is Chinese tourists that historically contributed to about 12% of total tourist arrivals in Malaysia. Also helping is China agreeing to extend its visa exemption facility for Malaysian citizens until the end of 2025 while Malaysia will extend the visa exemption for Chinese citizens until the end of 2026. Recall, the 30-day visa-free arrangement for Chinese and Indian visitors to Malaysia started from Dec 2023 (while China grants inbound visitors from Malaysia 15 visa-free days between 1 Dec 2023 and 30 Nov 2024). These should drive 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. The group is optimistic of resurgence in passenger numbers and connectivity, expected to be driven by the introduction of new airlines and services at key airports, including Kuala Lumpur International Airport, Penang, Kota Kinabalu and Langkawi. Amplifying the positive trajectory is the latest airlines’ seat capacity for 2024 showing an anticipated 13% increase over 2023, underpinned by the visa-free entry for Chinese and Indian passengers expected to boost for traffic recovery, particularly in the Northeast Asia Region.

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 re-activate 202 aircraft by end CY24 (presently 187 aircraft) available for operations and capacity to reach 83% of pre-COVID level. While CAPITALA has been able to fill up seats in its planes, there is room to boost yields to ensure profitability after accounting for depreciation, aircraft leasing charges and finance cost.

AIRPORT privatisation status - pre-conditional offer to final offer. We understand that three out of the four conditions have been fulfilled. Once the fourth condition is satisfied, a final offer is expected to be announced. To recap, a consortium comprising Khazanah, EPF, New York-based GIP, and ADIA is buying out AIRPORT shares not already owned, translating to a 67.01% stake for RM12.3b or RM11.00/share cash. The consortium does not intend to maintain the listing status of AIRPORT. The proposed offer is expected to be completed by 4QCY24.

CAPITALA’s regularisation plans to exit PN17 in the works. To recap, CAPITALA had recently announced the disposal of its aviation group to AirAsia X in exchange of shares. The draft circular and notice of Extraordinary General Meeting, outlining the proposed disposal of its aviation business, was submitted to Bursa Malaysia in July for their review and clearance and now awaiting approval from Bursa Malaysia. To recap, part of its regularisation plan to lift it out of the PN17 status involves two major corporate exercise namely: (i) divesting its aviation group to AirAsia X in exchange of shares, and (ii) a proposed listing of a unit, which is the licensee of the AirAsia brand on NASDAQ via entering a letter of intent with Atherium Acquisition Corp (GMFI), a special purpose acquisition company. We do not have any pick for the sector.

Source: Kenanga Research - 16 Sept 2024