8 April 2013
The local aviation sector has been raised to “overweight” from “neutral” on expectations of high traffic growth and rising profits, according to Maybank Investment Bank Research.
The research house said the sector had underperformed the FBM KLCI in 2012 due to depressed earnings, escalating fuel prices and regulatory uncertainty, adding that the sector had de-rated with an average decline of 27.6% in 2012.
But year-to-date for 2013, its top pick, Malaysia Airports Holdings Bhd (MAHB) gained 15% while the airlines were both up modestly by 6% in share prices.
MAHB shares rose five sen, or 0.83% yesterday to RM6.05, its highest in 16 months. The airport operator has gained 16.12% year-to-date with a 12-month consensus target price of RM6.47.
It is currently channelling its efforts to open klia2 on June 28 and closely monitoring the progress of the work being done by the contractors.
MAHB is employing 1,102 new personnel for klia2 of whom 746 are in aviation security, 86 in airport fire and rescue services, 98 in engineering and maintenance and 172 in operations services.
“We are now “overweight” on the sector as traffic growth will accelerate and profits will rise, in our view. Furthermore, valuations are undemanding and exhibit value. Volatile fuel price is the primary risk factor.
Maybank Research said passenger traffic growth in Malaysia in 2012 was 5% lower than its 10-year compounded annual growth rate of 7% while regional peers grew between 5% and 14%.
“This slower growth was due to MAS cutting capacity by 12% on its under-performing routes which benefited AirAsia and AirAsia X immensely as seen by their record load factors.
“Airlines across the region faced severe profit drops of between 30% and 40% year-on-year. AirAsia’s 2012 core net profit grew 0.3% year-on-year and MAS managed to reduce its losses by 44.5% year-on-year while MAHB posted a 2.2% year-on-year growth,” it said.
The research house said the worst was likely over, adding that traffic growth was expected to accelerate in 2013 and the robust domestic economy will underpin strong growth.
“We think the current aviation cycle is about to turn from the bottom and enter into a consolidation stage. The global economy is showing early signs of improvement and this should help to accelerate traffic growth, stabilise yields and raise the sector’s earnings outlook.
“Consolidation typically lasts between six and 18 months depending on the pace of economic growth and industry supply-demand balance,” it said.
It added that things are hotting up due to the entry of Malindo Air. There appears to be an overcapacity risk looming as AirAsia, AirAsia X and Malindo will collectively take in 27 aircraft in 2013.
Maybank Research said the main downside risk for the airline sector in 2013 is fuel prices – the largest cost item, comprising 40% to 45% of total costs.
It added there were fears about potential delays in the launch of klia2, currently scheduled for June 28 – management affirms it is on track for completion in May 2013 and that klia2’s construction was now more than 82% complete.