Malaysia Airports Holdings Bhd
(Oct 15, RM6.58)
Maintain hold with target price (TP) of RM7.20: MAHB continued to fall in September, dipping 1.4% year-on-year (y-o-y) on the back of a 1.2% and 1.6% decline in international and domestic traffic respectively. Traffic at KLIA main terminal building (MTB) continued to fare badly since the MH370/MH17 tragedies, falling 8.4% y-o-y, while klia2 posted a 1.4% gain — thanks to a 7.5% increase in international passengers. Overall passenger traffic in the third quarter of 2014 (3Q14) dipped 2.1% y-o-y, with KLIA MTB’s traffic falling by 10.2%. Following three consecutive y-o-y monthly declines, year-to-date traffic growth has moderated to 6.8%, a far cry from the 18.4% y-o-y growth seen in 1Q14.

The week-long school holidays in September failed to spur travel demand, partly due to the PT3 and SPM exams in October and November and the re-sitting of two UPSR exam papers on Sept 30. Domestic traffic was hurt by weak demand for flights from KL to East Malaysia, while international traffic continues to be dampened by Chinese travellers’ aversion towards vacationing in Malaysia. MAHB, which guided for 7% growth in 2014 passenger traffic in August, has lowered its guidance to 4.3%, which is largely in line with our 4.4% growth expectation. The guidance implies 2.2% traffic contraction in 4Q14.

Current industry capacity and airfare levels are unsustainable, given the fact that three of the four major airlines in the country are loss-making. Capacity cuts are imminent in order to lift yields to more sustainable levels, in our view. KLIA MTB’s faster-than-average traffic decline is also a cause for concern for MAHB, as international passenger service charges (PSC) at KLIA MTB is double the amount charged at klia2. The likely narrowing of the gap between KLIA MTB and klia2’s PSC remains the re-rating catalyst to look out for, but both the timeline and quantum are uncertain. Despite the weak traffic growth and risks of a possible equity issue to finance the purchase of 40% of Istanbul Sabiha Gokcen, we believe the downside to MAHB’s share price is limited to RM7 per share. We maintain our “hold” call and TP based on discounted cash flow of RM7.20. — CIMB Research, Oct 15

This article first appeared in The Edge Financial Daily, on October 16, 2014.