AIRASIA (5099) - AirAsia remains top pick in Malaysian aviation space

Aviation sector
Remain overweight: The Malaysian Aviation Commission (Mavcom) is expected to complete its review of passenger service charges (PSCs) later this year, with klia2’s PSCs segmented into international, intra-Asean and domestic travel. This tiered model “could see some rates go up and some go down”.

A possible reduction in klia2 PSCs will likely apply to intra-Asean travel, which accounts for 47% of KLIA traffic. But here are some things to consider. First, Malaysia Airports Holdings Bhd (MAHB) may be able to get marginal cost support compensation for any reduction in tariffs. Second, Malaysia Airlines Bhd’s planned move of some leisure flights to klia2 will involve extra costs of operating from two terminals.

Third, operating from two terminals reduces the ability of Malaysia Airlines to facilitate connecting traffic, as airside transfers between the two are not available. Hence, we doubt that Malaysia Airlines will transfer significant traffic to klia2.

If Mavcom raises the long-haul international PSC at klia2, but reduces the short-haul international PSC, it will actually be beneficial to AirAsia Bhd as 68% of its seat capacity is deployed within Asean. However, we view this as improbable.

AirAsia remains our top pick in the Malaysian aviation space, with our target price (TP) based on a calendar year 2017 forecast price-earnings ratio of nine times and adding in an expected special dividend of 96 sen. Recent developments in Turkey have dulled MAHB’s near-term earnings prospects. Our “add” call on MAHB (discounted cash flow-based TP) is dependent on it securing klia2 tariff hikes. — CIMB Research, July 7

AIRASIA (5099) -  AirAsia remains top pick in Malaysian aviation space