AmWatch - Aviation Sector : Outbreaks vs. Malaysian airlines NEUTRAL, 14 Aug 2014

SECTOR FOCUS OF THE DAY

Aviation Sector : Outbreaks vs. Malaysian airlines             NEUTRAL

The Ebola outbreak has worsened with the World Health Organisation (WHO) recently reporting that death toll from the outbreak has reached 1,013. This is the worst outbreak in history. Two key disease outbreaks in the past were the SARS outbreak in 2003 and the swine flu outbreak in 2009. The swine flu outbreak occurred during the financial crisis when global air traffic was already experiencing a slowdown. Another outbreak was the bird flu (SARS) in 2003. Based on past trends, the impact on the aviation industry (once it reaches a pandemic stage) is negative and immediate.

SARS outbreak was formally announced in late February 2003 and took four months to contain before WHO formally announced SARS as epidemic in late June 2003. As a result of SARS, MAS registered four consecutive months of passenger traffic decline. MAS’ valuation de-rated by almost 45% YoY to as low as 1.4x PBV during the period (vs. average historical PBV of 1.7x). Airasia was not operating any Chinese routes in 2003, while the 2009 swine flu impacted mainly trans-pacific flights, which Airasia does not operate.

We have seen little impact on regional airlines’ share price when news of the Ebola outbreak first surfaced in March 2014, given that it is not widespread at this point. We still recommend investors to take up Khazanah’s privatisation offer (FV of RM0.27/share). Out of the two listed airlines under our coverage, MAS has bigger exposure to international capacity via its long-haul operations. However, MAS only had 0.2% revenue exposure to the African and South American region in FY12, and no exposure at all in FY13. AirAsia remains a HOLD (FV: RM2.50/share). Its routes are limited by a 4-hour flight range, which means the majority of its routes are contained within the ASEAN region. As such, wee see little risk of a direct impact from the Ebola outbreak.

QUICK TAKES

Sarawak Cable : Due diligence extended for 30 days        UNDER REVIEW

Malaysia Airports : Weaker passenger traffic in July         HOLD

Plantation Sector : Key Takeaways from Bumitama’s Conference Call      NEUTRAL

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