New airline may stimulate travel volumes
? Reiterate Add as the less-deadly Omicron variant may herald the endemic stage of Covid-19, while a new airline in Malaysia could stimulate travel.
? An impending revision to the Operating Agreement (OA) may also improve the structural profitability of MAHB.
? Our DCF-based TP is reduced to RM6.95, on downward revisions to our 2022F forecast for passenger traffic on account of Omicron disruptions.
Omicron to herald endemic stage of Covid-19?
Evidence is growing that the Omicron variant of the Covid-19 virus is less deadly than the Delta variant that raged through 2020, because Omicron is less adept at infecting and damaging the lungs, and because of higher vaccination coverage globally. A surge in Omicron infections around the world has not led to a similar surge in hospitalisation and deaths. As Omicron becomes better understood, we hope that border restrictions will gradually relax. For instance, Thailand is reportedly considering restarting its quarantine-free programme for vaccinated travellers, which was suspended on 22 Dec 2021 on Omicron fears. While we cannot predict the precise timing of border reopenings, the newsflow on Omicron is providing some hope, and MAHB remains a good recovery play.
New airline in Malaysia could trigger price competition
A new airline going by the name of MYAirline is currently in the process of starting up. It has recruited many individuals and negotiated the lease of two A320s with more to come. An airline starting up during the pandemic with a clean balance sheet and access to ultralow-cost aircraft leases will likely ensure low operating costs and the ability to compete aggressively with incumbents for market share by offering sustainably low airfares. Meanwhile, AirAsia’s fleet grew last year despite the pandemic by absorbing its affiliates’ planes, and it will likely be eager to redeploy its fleet and retain its market share. MAS has renegotiated its aircraft lease rates and is in a good position to compete, while Malindo is also considering bringing back its jet planes from Indonesia if demand in Malaysia warrants their return. In short, we think that aggressive price competition will likely follow a surge in aircraft seat capacity in the post-pandemic period, which may stimulate passenger traffic volumes, with MAHB as the unequivocal winner.
The new OA could be a structural rerating catalyst
Other rerating catalysts for MAHB include the potential signing of the new OA with the government of Malaysia, which may result in an increase in aeronautical tariffs. The Aeropolis development may also have its lease period set at 99 years, freeing it from the constraints of the airport concession, which ends in 2069F. Meanwhile, ISG is negotiating for a deferral of the payment of its €115m concession fee due in Jan 2022F while negotiating for a permanent waiver of the €115m concession fee due in Jan 2021 that
was previously deferred indefinitely. Downside risks: longer-than-expected closure of international borders due to governments’ fears of Omicron or a future variant.