HLIB: MAHB to benefit from border reopening


HONG Leong Investment Bank Bhd (HLIB) has upgraded Malaysia Airports Holdings Bhd (MAHB) to ‘Buy’ from ‘Hold’ with a higher target price of RM8.05 (vs RM6 previously) as it foresees the airport operator to be a major beneficiary of border reopening exercise.

Last Friday, Malaysia opened its national borders to all travellers with minimal requirements after the country transitioned into the endemic phase.

HLIB analyst Daniel Wong noted regional countries are also opening up their borders with similar policies.

Wong expects MAHB to leverage on the anticipated strong recovery in air travel demand and gain from its lower cost structure and commercial reset programmes implemented during the Covid-19 pandemic.

“Airlines are planning towards reinstating their international capacities back to pre-pandemic levels. MAHB will be a key beneficiary of the reopening of borders,” he stated in a research report on MAHB last Friday.

He noted domestic demand has recovered strongly back to 60% of pre-pandemic levels since the gradual relaxation for domestic travel since October 2021.

He noted the pandemic has provided MAHB the opportunity to reset its operation since the pandemic in 2020.

“Various cost containment measures were implemented with core cost reduction of 32.9% in the financial year of 2021 (FY21) versus FY19, and management would remain cautious on operational expenditure in FY22.

“Management guided to potential cost savings of more than RM50 million annually under Cooling Energy Supply Sdn Bhd’s joint venture with Tenaga Nasional Bhd — effective July 2021,” he noted.

MAHB’s commercial reset programme (ongoing and implemented since FY20) is set to reap fruition with the expected increase in passenger movement and new airport shopping experiences.

“The programme reconfigures the mix of shops (acclaimed right size, right brand, right balance, right location and higher yields) and increases overall retail space by 10%,” he noted.

MAHB’s new operating agreement (OA), which has been continuously dragged out, is now expected to conclude by the middle of 2022 as the government gave heads-up approval to the principal terms of the new OA.

“There will be new terms to reconfigure airports development capital expenditure via a more robust and sustainable range of funding models in order to deliver the investments required,” he added.

Notably, the funding models will also determine up-front and the fair returns to MAHB and the government.

MAHB’s wholly-owned Istanbul Sabiha Gokcen Airport (ISGA) in Turkey is expected to improve its performance as it saw very strong passenger movement rebound towards the second half of 2021 with an average 80%-85% of a pre-pandemic levels as Turkey opened up its national borders and allowed tourism.

Wong added ISGA has also undergone cost control exercises during the pandemic with core costing dropping 14.9% in FY21

“The newly contracted duty-free operator Dufry AG since the fourth quarter of 2020 is expected to provide stronger earnings upside to ISGA leveraging onto continued passenger recovery in FY22, given Dufry’s strong branding and extensive experiences with operations in over 60 countries,” he added.

The ongoing Russia-Ukraine conflict may however affect Turkey’s tourism in the near term, according to the analyst.

“With the improving operating environment and the implemented reset programmes, we believe MAHB would stage profitability reprieve back to pre-pandemic levels by the end of 2022 or early of 2023.

“We take note that MAHB’s now weaker balance sheet wise with a higher net gearing level of 74.8% at the end of FY21 (versus 40.7% at the end of FY19) as management shored up liquidity and restructured loan repayments with reported losses during the pandemic,” Wong noted.

Nevertheless, HLIB deemed the net gearing level is still manageable and expects MAHB to reduce its net gearing back to 43.8% by the end of FY24.

“We have adjusted our assumptions on Malaysia passenger movement in the FY22 to FY23 to 68.2 million (543.4% year-on-year [YoY]) and 98 million (43.8% YoY) respectively, while ISGA to 35.7 million (40.3% YoY) and 39.1 million (9.5% YoY) respectively,” he further wrote.

The investment bank forecast MAHB’s FY22 to record lower losses of RM17.8 million and to turn around in FY23 with a profit of RM596.5 million.