KUALA LUMPYR (June 15): Kenanga Research has maintained its "neutral" call on the aviation sector after a sequential improvement in the first quarterly earnings due to stronger-than-expected recovery in the demand for air travel and yields.

“We expect the demand for business and leisure air travel to continue to recover throughout CY2023 (calendar year 2023),” it said in a note on Thursday (June 15).

The research firm, citing Tourism Malaysia, said tourist arrivals in Malaysia are expected to jump 60% to 16 million in CY2023 from an estimated 10 million a year ago. Kenanga also expects tourist arrivals to hit pre-pandemic level by 2024.

“A key driver is Chinese tourists that historically contributed to an estimated 12% of total tourist arrivals in Malaysia. In 2024, we project tourist arrivals to jump further by 24% to 20 million, compared to pre-pandemic level of 26 million.

“This should underpin growth in Malaysia Airports Holdings Bhd’s (MAHB) passenger throughput demand in 2023,” it added.

Kenanga noted that aircraft movements at the airport are pointing towards increased medium and long-haul flights to Perth, Sydney, Auckland, Southeast Asia and South Asia destinations.

KL International Airport saw the return of Kuwait Airways after a seven-year hiatus, while two other foreign carriers will resume non-stop flight operations, i.e. KLM Royal Dutch Airlines to Amsterdam and All Nippon Airways to Tokyo, after temporarily ceasing operations due to the Covid-19 pandemic.  

“In addition, Malaysia Airlines has increased its flight frequency to Tokyo from November 2022. AirAsia Group, meanwhile, is focusing on its medium-haul operations by increasing its Malaysia AirAsia X flights to 44 weekly across 10 routes from November 2022,” it noted.

However, Kenanga noted MAHB (market perform; target price: RM7) may not see sufficient cash flow from a tariff hike pegged to consumer price index recently proposed by Malaysia Aviation Commission for capex purposes, particularly for airport expansion and maintenance.  

On the other hand, the research house said it is still waiting on a more viable and holistic regularisation plan to lift Capital A Bhd out of its Practice Note 17 (PN17) status.  

Kenanga noted that Capital A plans to announce the details of its PN17 regularisation plan by early-July 2023 with completion expected by the end of the third quarter of CY2023.  

“While we continue to like Capital A for being a beneficiary of the recovery in air travel as the pandemic comes to an end, we are mindful of it still being under the PN17 status,” it said, adding that it does not have any picks for the sector.

MAHB last closed at RM6.09 on Wednesday (June 14), implying a market capitalisation of RM11.5 while Capital A's last closing price was 80 sen, valuing the group at RM3.3 billion.