Listed on the Malaysian Stock Exchange (MAHB) and in addition traded over the US OTC markets (Stock: OTC:MYPRF; ADR: OTC:MYPRY), Malaysia Airports Holdings Berhad (MAHB) is the key airport operator in Malaysia, working all however one in all Malaysia’s airports. In addition, MAHB additionally owns the Istanbul Sabiha Gokcen International Airport (ISG) and an 11% stake in Rajiv Gandhi International Airport.
Prime beneficiary of rising air journey demand in Malaysia
MAHB is the key airport operator in Malaysia, offering administration, upkeep, and operational companies to all however one airport. As such, we view MAHB to be a robust proxy to air journey demand in Malaysia.
Recognizing the robust financial advantages led to by Chinese outbound tourism, the Malaysia Tourism Board has made a number of efforts to woo Chinese vacationers into the nation. These embrace Entri, a concession that permits Chinese vacationers to go to Malaysia for a interval of no more than 15 days, with out the necessity for vacationer visas. In addition, these touring for between 15 and 30 days will have the ability to get an eVisa permitted inside 24 hours on working days.
In addition, the Malaysian Tourism Board and AirAsia have signed a two-year settlement to advertise tourism in Malaysia by means of promoting and promotional actions/campaigns. Both events plan to facilitate familiarization journeys for client, commerce, media, and journey businesses to Malaysia; synergy in planning tourism growth and air transportation to offer higher connectivity and market intelligence sharing and help for the event of the tourism sector, in addition to, joint roadshows between each events to market Malaysia to commerce companions.
The advantages to MAHB have been evident, with general passenger site visitors in 3M17 rising by c.12%, primarily pushed by the c.15% development in non-ASEAN site visitors within the interval. We anticipate MAHB to proceed to learn from the expansion in Chinese outbound tourism, supported by the concerted effort between the Malaysian non-public sector and tourism board. This would translate to greater aeronautical revenues within the type of Passenger Service Charge (PSC)/airport tax collections in addition to rising non-aeronautical revenues as these passengers spend on retail/F&B in Malaysian airports. Further supporting the expansion in inbound tourism within the close to time period is the internet hosting of the Visit ASEAN@50 Campaign at the side of the Kuala Lumpur 2017 Sea Games.
That stated, we have now additionally famous that neighboring nations have additionally stepped up their efforts to pursue Chinese vacationers. We have addressed this in a separate level within the later a part of the article.
Beneficiary of Malaysia Airlines, Malindo Air, and AirAsia development plans
Malaysia Airlines, the Malaysian nationwide provider, is at present within the midst of a turnaround from its lows in 2014, when it suffered two unlucky incidents. Firstly, Flight MH370 (from Kuala Lumpur to Beijing) mysteriously disappeared and Flight MH17 (from Amsterdam to Kuala Lumpur) was shot down in Eastern Ukraine. Due to the incidents, its gross sales have been considerably affected, and the corporate started to undertake restructuring plans publish privatization in 2014.
The turnaround has been progressing nicely, and Malaysia Airlines is executing a number of initiatives, together with including 11 new routes in 2017 and including extra plane to its fleet. CEO Peter Bellew had commented that Malaysia Airlines was trying to lease between six and eight Airbus A330s or Boeing 777s to be used from 2018 and one other seven to 9 plane from 2019.
Secondly, Malindo Air is within the ultimate phases of closing a code share take care of a Middle Eastern airline and is in discussions with 30 different airways relating to interline preparations. It can also be taking supply of seven new aircrafts in 2017. Furthermore, AirAsia, a number one Malaysian Low Cost Carrier (LCC) plans so as to add eight aircrafts to its Malaysia-based fleet.
Malaysia Airlines, Malindo Air, and AirAsia depend Kuala Lumpur International Airport as their main hubs. Hence, their enlargement plans will profit MAHB as utilization of MAHB’s amenities will enhance. This will serve to help aeronautical revenues development. Furthermore, MAHB might develop its non-aeronautical revenues from the elevated passengers (transit/alighting) spending in its airports.
Increasing PSC serves to offer MAHB with a long-term regular income development
PSC stays a key income development space for MAHB. In 2017, the PSC was raised by the Malaysian Aviation Commission for home departures (from MYR6/pax-MYR9/pax to MYR11/pax) and worldwide (non-ASEAN) departures (from MYR35/pax-MYR71/pax to MYR50/pax-MYR73/pax). As for ASEAN worldwide flights, a brand new tier has been launched at MYR35/pax, which is a lower from earlier ranges.
We don’t assume that the rising PSC will influence passenger site visitors negatively because it constitutes a small portion of general ticket value. This has been mirrored within the 3M17 outcomes. Rising worldwide (non-ASEAN) PSCs, coupled with robust development in inbound Chinese vacationer visits, have contributed to a c.14% YoY development in PSC revenues.
Longer time period, we anticipate rising PSC (albeit steadily) to be a key income development driver for MAHB. PSC in Malaysia stays decrease than different nations in Asia, illustrating the expansion potential of the income supply.
FCFF anticipated to enhance going ahead
With the completion of Kuala Lumpur International Airport 2 (KILA2) and the acquisition of ISG, the enlargement CAPEX cycle for MAHB resulted in 2014. We anticipate MAHB’s FCFF to enhance going ahead, supported by rising working money circulation and considerably decrease CAPEX. This will probably be used to cut back internet gearing, which eases from zero.52x in FY15A to zero.46x in FY16A and will doubtlessly permit MAHB to pay out the next dividend to its shareholders. In this occasion, MAHB’s share worth might probably be catalyzed upwards.
While MAHB’s fundamentals for the following few years are enticing, our key concern lies with its valuation. Its share worth has risen c.32% YTD, and we consider that majority of the constructive outlook, together with rising PSC and rising inbound vacationer arrivals in 2017, has been priced in.
MAHB is richly valued at c.38x FY18E PE, considerably greater than Asian friends, together with Airports of Thailand (c.24x), Shanghai International Airport, (c.19x) and Shenzhen Airport (c.21x). Furthermore, we view Shanghai International Airport and Shenzhen Airport as extra direct proxies of the rising outbound Chinese tourism. In our view, MAHB’s YTD share worth efficiency has priced within the enticing development outlooks (stemming from rising PSC in 2017 and rising Chinese vacationers guests) for the following two years.
We consider that the market has not priced in a number of danger elements.
Competition from neighboring nations for Chinese vacationers
While 2017 YTD inbound Chinese vacationer numbers are rising healthily, we notice that neighboring nations, together with Indonesia, Singapore, and Thailand are additionally participating in intensive efforts to woo this group as nicely.
From our on-the-ground checks, we’d additionally argue that Thailand stays a extra enticing vacationer vacation spot to Chinese vacationers than Malaysia, with its seashores (e.g. Phuket), purchasing locations (e.g. Bangkok), and quite a few temples interesting to the Chinese vacationers who’re on the lookout for a number of experiences in a single journey. We notice that tourism arrivals into Thailand nonetheless grew c.9% regardless of the crackdown on low cost tour packages for Chinese vacationers and leap in visa-on-arrival charges, suggesting the inherent desirability of Thai vacationer sights.
We assume additional step-up in competitors for Chinese vacationers might adversely have an effect on inbound guests’ arrivals into Malaysia. News circulation of decrease inbound guests might dampen sentiment and have an effect on MAHB’s share worth adversely.
Ongoing volatility in Turkey
Despite a c.four% YoY enhance in passenger site visitors in ISG in March 2017, we consider that the weak spot in ISG’s passenger site visitors will probably proceed within the close to time period. The political scenario in Turkey stays extremely risky and the referendum in April 2017 solely serves as an example the divisions throughout the nation, with votes for and in opposition to Erdogan’s reform being break up nearly 50/50. We consider that overseas vacationers will want to watch a interval of stability with out a stream of destructive media reporting equivalent to journalists’ suppression and terror assaults. Hence, any additional destructive information of the nation would probably have an effect on ISG’s site visitors adversely and, consequently, its financials.
Considering the a number of basic elements in addition to MAHB’s share worth efficiency (c.32% enhance) in 2017, we’d argue that the market has priced in majority of the positives (i.e. rising PSC and rising inbound tourism into Malaysia in addition to c.four% YoY development in passenger site visitors in ISG). We additionally consider that MAHB is relatively overvalued versus its Asian friends, with a c.38x FY18E PE. This is particularly so contemplating that we deem Chinese airports to be direct beneficiaries of the Chinese outbound tourism. Coupled with our view that competitors for Chinese vacationers will probably stiffen up within the close to time period in addition to the continuing volatility in Turkey, we view that there’s extra draw back danger for MAHB’s share worth.
This article is a part of Seeking Alpha PRO. PRO members obtain unique entry to Seeking Alpha’s greatest concepts instruments to completely leverage the platform.
Disclosure: I/we have now no positions in any shares talked about, and no plans to provoke any positions throughout the subsequent 72 hours.
I wrote this text myself, and it expresses my very own opinions. I’m not receiving compensation for it (apart from from Seeking Alpha). I’ve no enterprise relationship with any firm whose inventory is talked about on this article.
Additional disclosure: Thank you to your time in studying the above article. I learn and write on a variety of corporations regularly. If you have an interest in acquiring the most recent updates, you might achieve this by clicking “Follow” button. This article is meant to offer info to readers and by no means does it represent funding recommendation. As I’ve no data of particular person reader’s circumstances, objectives, and/or portfolio focus or diversification, readers are anticipated to finish their very own due diligence earlier than buying any shares or different securities talked about. This publish is illustrative and academic and isn’t a selected suggestion or a suggestion of funding product or companies.
Malaysia Airports Holdings: Stiff Competition For Chinese Tourists Not Priced In by: Farah Grimm published: