The research team at Kenanga Investment Bank Bhd has maintained its “neutral” call on aviation counters.
This is despite a “sequential improvement” in earnings in the first quarter of the year (Q1 2023) that led to a stronger-than-expected recovery in the demand for air travel and, as a result, yields too.
Kenanga Research vice-president Raymond Choo said the demand for business and leisure air travel is likely to continue to improve for the rest of the year.
In its research note, Kenanga said the recent proposal by the Malaysian Aviation Commission (Mavcom) to peg tariff hikes to the consumer price index (CPI) might not be sufficient to help Malaysia Airports Holdings Bhd (MAHB) generate enough cash flow for capital expenditure as well as airport expansion and maintenance.
“While Mavcom also proposes a mechanism for MAHB to recoup losses, we are concerned with MAHB’s cash flows,” Choo said.
The research house has set a target price of RM7 for the airport operator, up from RM6.90 previously for an upside of 1.4%.
Choo noted that Tourism Malaysia has projected a 60% jump in tourist arrivals to 16 million this year, up from 10 million last year.
Chinese arrivals, that has historically contributed about 12% of total arrivals, is likely to remain a key driver.
Kenanga Research expects tourist arrivals to show a 24% increase to 20 million in 2024, still lower than the pre-pandemic level of 26 million.
However, it said, this should underpin growth in MAHB’s passenger throughput demand in 2023.
Choo said an increase in medium and long-haul flights to Perth, Sydney and Auckland as well as destinations in Southeast Asia and South Asia, has amplified the traffic growth trajectory.
Kuwait Airways has resumed flights to the Kuala Lumpur International Airport (KLIA) after a seven-year hiatus while KLM Royal Dutch Airlines and All Nippon Airways will be restarting non-stop flights to Amsterdam and Tokyo respectively.
“In addition, Malaysia Airlines increased its flight frequency to Tokyo from November 2022, while AirAsia Group is focusing on its medium-haul operations by increasing its Malaysia AirAsia X flights to 44 weekly along 10 routes from November 2022,” Choo said.
On Capital A Bhd (Capital A), the research house said the clock is ticking on a more viable and holistic regularisation plan to lift AirAsia’s parent out of its Practice Note 17 (PN17) status.
Kenanga Research has set Capital A’s target price at 84 sen, up from its last price of 79.5 sen, for an upside of 5.7%.
Looking farther into the year, Kenanga Research projects Capital A’s system-wide revenue seat km (RPK) to grow 79% to 43 billion in FY2023, after recovering by 20 billion to 24 billion in FY2022.
“Capital A expects its passenger demand to continue to rise in 2023, judging from the encouraging load factors recorded at 159 international routes,” Choo said.
The group has reactivated 157 aircraft in the first quarter of 2023 with plans in place to reallocate aircraft to routes that have stronger demand, he added.
The group is targeting to have all its 215 aircraft deployed by the end of 2023 to cater to rising demand.
Capital A plans to announce the details of its PN17 regularisation plan by early July with completion expected by the end of the third quarter this year.
“While we continue to like Capital A 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,” Choo said.
Kenanga Research does not have any pick for the sector.
At the time of writing, MAHB’s share price was down a sen or 0.14% at RM6.89 with a market capitalisation of RM11.5 billion, while Capital A’s share price was 80 sen giving it a market capitalisation of RM3.29 billion.