KUALA LUMPUR (Oct 18): CGS-CIMB Research has downgraded the aviation sector from "overweight" to "neutral", with Malaysia Airports Holdings Bhd (MAHB), Singapore Airlines and SATS Ltd downgraded from "add" to "hold".

The research house downgraded its calls back to "hold" after strong share price performances driven by market optimism about rising global Covid-19 vaccination rates and the positive outlook for domestic and international air travel restoration in the next three to six months.

It broadly forecast that international pax traffic for Malaysian and Singapore aviation players will recover to 40% to 50% of pre-pandemic levels of 2019 in 2022, and to 70% to 80% in 2023.

“These forecasts are based on our observations that major aviation markets in Northeast Asia, like China and Hong Kong, remain shut despite their high vaccination rates, while Malaysia and Singapore remain adverse to South Asian arrivals as they are perceived to be very high-risk. In Southeast Asia, vaccination rates in Vietnam, the Philippines and Indonesia remain below 50% of their respective populations, which may delay the full reopening of their aviation markets to sometime in 2022,” it said.

In a note last Friday, the research house said AirAsia Group Bhd (AAGB) remained a "reduce", while SIA Engineering remained an "add".

CGS-CIMB said investor optimism about the nascent resumption of domestic and international air travel had lifted share prices to levels it no longer considered attractive.

“We prefer airport plays as they offer direct exposure to higher pax traffic, while airlines may face competitive yield pressures and higher oil prices,” it said.

Meanwhile, CGS-CIMB said AAGB remained a conundrum as its share price doubled in the past 12 months, moving against its "reduce" call and low target price of 23 sen.

“AAGB is currently trading at more than five times our CY21F RNAV (calendar year 2021 forecast revalued net asset value) of 23 sen, while in 2019, AAGB traded at an average P/BV (price-to-book value) multiple of only 1.15 times.

:We think that the market has implicitly valued AAGB’s digital businesses at RM3.5 billion, which is rich and assumes that AAGB can succeed against incumbent digital behemoths — an assumption that we are not yet prepared to make,” it said.

At 9.56am on Monday, AAGB had dipped 1.69% or two sen to RM1.17, valuing it at RM4.56 billion.