An Omicron opportunity to reenter the stock

■ 9M21 core net loss made up just 60% of our previous FY21F loss forecast (79% of consensus), above expectations due to low opex in Malaysia (MY).
■ After raising core earnings forecasts and rolling forward to end-CY22F, we raise our DCF-based TP to RM7.45 despite higher cost of equity rates.
■ We upgrade from Hold to Add as the sharp sell-off after news of the Omicron variant emerged is a good opportunity to reenter the stock.

Turkey’s ISG is the star of the 3Q21 show…

3Q21 core net loss of RM144m was 32% narrower than 2Q21’s RM212m loss, mainly due to the sharply improved performance at ISG, which saw its pax traffic rise 89% qoq as Turkey eased border restrictions from 10 Jun 2021, leading to a sharp recovery in both domestic and international pax volumes. Consequently, ISG’s core net loss declined to just €2.4m in 3Q21 vs. €10.8m in 2Q21. The MY airports also saw their core net loss narrow to RM146m in 3Q21 from RM162m in 2Q21; while aeronautical revenue was led lower qoq by the 21% decline in MY pax traffic (due to the imposition of full Movement Control Order from 1 Jun 2021), non-aeronautical revenue was higher qoq as MAHB did not offer its airport tenants any rental rebates in 3Q21 (which it did in 2Q21). On a yoy basis, MAHB group’s core net loss in 3Q21 halved on higher ISG revenue (partially offset by lower MY revenue) and lower costs at both ISG and MY due to diligent cost control.

… and it’s Malaysia’s turn to shine in 4Q21F

The 4Q21F outlook continues to improve. In terms of pax traffic, ISG is entering its winter lull but the seasonal drop in traffic from the 3Q21 has been less pronounced compared to previous years as airlines’ services continue to be restored. MY pax traffic in Oct 2021 of 1.3m was higher than the 1m for the whole of 3Q21 as, from 11 Oct, domestic air travel restarted and Malaysians are allowed to travel abroad. Thailand opened its borders to quarantine-free inbound travel by Malaysians from 1 Nov and Singapore established a Vaccinated Travel Lane (VTL) with Kuala Lumpur from 29 Nov. Malaysia is working to
implement something similar with Indonesia’s Jakarta and Bali in early-2022F while Vietnam may reopen its borders to Malaysians, also early next year. Talks have commenced with Australia and the UK for travel arrangements. The key downside risk is if the Omicron variant of the Covid-19 virus turns out to be more virulent and dangerous than expected, which may lead to international borders slamming shut again.

Recent sell-off takes MAHB’s share price back five months

Having said that, after the Omicron-related sell-off, MAHB’s share price is now close to its lows in Jul and Aug when Malaysia’s new Covid-19 cases scaled to its peak and when movement restrictions were at their most severe. This may be an opportunity to accumulate and a potential rerating catalyst is if Omicron turns out to be less deadly than feared. We also highlight that, for the past several quarters, we had overestimated MY’s cost base and MAHB’s robust cost control will serve it very well in the coming recovery.