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MBKE: 2 Malaysian Aviation Stocks To Consider Amidst Struggles
Source: Cathay Pacific Airways (Orange) and Singapore Airlines (Blue), Bloomberg
With Cathay Pacific Airways hitting the headlines as the company suffers major losses from its hedging of oil, Singapore Airlines is not doing much better either. This comes as airlines in the region face strong competition from Chinese, Korean and budget Airlines that offer to fly passengers at a fraction of the price.
Full airlines are feeling the operation margin pressure as they are forced to engage in a price war with them. It is about time we revisit the topic of whether it is still viable to invest in the aviation industry given the intense competition.
Previously, we looked at Singapore’s Aviation industry in the article here. In this article, we will be looking across the causeway to present the opportunities available for investors as growth remains strong in the country’s aviation industry.
Malaysia Airports Holdings Berhad
Source: Malaysia Airports, Bloomberg
Malaysia Airports Holdings Berhad (KLSE: AIRPORT) is a holding company and operator of various domestics and international airports in Malaysia. In addition, the group also operates two airports overseas which are in India and Turkey respectively.
The return of Chinese tourists in Malaysia after the unfortunate series of airlines mishaps in 2014 that have seriously affected tourism will be one of the main drivers of the industry. Malaysia Airports noted a strong traffic growth of 10 percent in the first two months of 2017 that is expected to boost the group’s retail revenue.
Furthermore, China’s Ambassador expects tourist arrivals from China to reach three million this year. This comes as the standoff between China and South Korea has led to the Chinese government to prevent its citizens from going the East Asian nation. Instead, the Chinese government has encouraged its citizens to visit Thailand, Philippines and Malaysia.
Analysts from Maybank Kim Eng Research gave Malaysia Airports a “Buy” call with a target price of MYR 7.52.
AirAsia Berhad
Source: AirAsia, Bloomberg
The main highlight of Malaysia Aviation sector will definitely be AirAsia Berhad (KLSE: AIRASIA). Looking in the Singapore market, there is no longer any budget airlines listed there since the privatisation of Tiger Airways by Singapore Airlines.
In addition, AirAsia has competitive advantages against its peers in Asia as they are the first low-cost carrier in Asia to be able to fly directly into the US. AirAsia also controls a large market share being the largest low-cost carrier and fourth largest airline in Asia.
2017 will look to be a year of continuous growth for AirAsia as demand remains robust and supported by strong profit margin. They are one of the rare airlines that are not afraid of fare wars against other airlines given its cost advantage.
It is looking to push for a higher utilisation rate of its air crafts, renegotiating airport charges, optimising fuel consumption and increase in digitisation to further improve margins.
AirAsia will look to recycle its capital as it is selling its aircraft leasing arm for US$1 billion and planning for IPO of its Indonesian and Philippines associates. The sale of its aircraft leasing unit is likely to bring strong divestment gains against its book value given the favourable currency translation.
Analysts from Maybank Kim Eng Research gave AirAsia a “Buy” call with a target price of MYR 3.22.
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