Opportunities seen in price weakness of aviators
KUALA LUMPUR: Analysts are still neutral on the aviation sector due to in rise in operating challenges plaguing the industry.
However, they pointed out that there is opportunity to accumulate on the current share price weakness of certain players in the industry; particularly Malaysia Airports Holdings Bhd (MAHB), as prospects have been viewed as favourable.
“To recap, we downgraded the sector from overweigh’ to neutral post the February 2019 reporting season due to the heightened operating challenges in the sector with AirAsia Group Bhd (AirAsia) facing more yield compression while MAHB is busy beefing up its operating team in order to meet the Quality of Service requirement set by the Malaysian Aviation Commission (Mavcom).
“However, considering the recent share price weakness for MAHB, which came down by 7.7 per cent, year to date (YTD), we believe that investors can take this opportunity to accumulate on weakness, premised on the prospects of the extension of its operating agreement,” said the research team at Kenanga Investment Bank Bhd (Kenanga Research) in a report.
It noted that MAHB’s management released its FY19 headline KPIs targeting an EBITDA of RM2,163.3m (inclusive
To recap, we downgraded the sector from overweigh’ to neutral post the February 2019 reporting season due to the heightened operating challenges in the sector with AirAsia Group Bhd (AirAsia) facing more yield compression while MAHB is busy beefing up its operating team in order to meet the Quality of Service requirement set by the Malaysian Aviation Commission (Mavcom).
of its airport in Turkey) with Malaysia’s earnings before interest, tax, depreciation, and amortisation (EBITDA) flattish at RM1,210.1 million compared to FY18, despite targeting passenger growth of 4.9 per cent in Malaysia.
It added that this was due to management’s intention to incur more operational capex for the maintenance for KLIA and KLIA2 in order to meet the quality of service (QoS) set by Mavcom.
It also indicated that Penang Airport is currently operating 20 per cent above its original capacity and a capacity upgrade/ expansion is imminent soon followed by KLIA.
“As for the extension of their operating agreement from 2034 to 2069, MAHB will be tabulating their proposed Regulated Asset Base (RAB) framework to the government and Mavcom by 3Q19 for validation as the first cycle of RAB is scheduled to be enforced by next year January 1.
“We believe that it would be a rerating catalyst for MAHB if they are able to secure the extension of their operating agreement through the implementation of RAB, as it would allow them to raise Passenger Service Charges for the funding to develop or expand its airports coupled with longer depreciation and amortisation period that would further reduce their depreciation and amortisation costs.
“We opine that a gradual increase in PSC charges would not deter travellers from flying especially when Malaysia is one of the very few countries with low PSC charges,” Kenanga Research said.
Meanwhile, it noted that the proposal of an airport REIT and departure levy is creating uncertainties and confusion amongst investors, particularly as details on the proposed structure is lacking with minimal updates.
“While we are not against the proposal of the departure levy, we maintain our view that the proposed rate of RM40 and RM20 for international and Asean passengers, respectively, should go through a study by the regulator Mavcom, which was created to promote a level playing field for all stakeholders,” it added.
As for the performance of airlines, Kenanga Research said, over in 4Q18, share price for AirAsia registered positive return of two per cent while MAHB registered negative return of two per cent.
“Still, we are of the view that the share price performance in the quarter was relatively stable in the face of uncertainties in the sector which is highly dependent on the government’s decision and mandate, such as the development of new airports, implementation of departure levy and others,” it added.
Kenanga Research