This article first appeared in The Edge Financial Daily on August 30, 2018

Malaysia Airports Holdings Bhd
(Aug 29, RM9.33)
Downgrade to neutral with unchanged target price (TP) of RM9.88: Malaysia Airports Holdings Bhd’s (MAHB) core net earnings in its first half ended June 30, 2018 (1HFY18) at RM243.3 million came in within expectations, accounting for 47.4% and 55.2% of our and consensus expectations respectively.

While our optimism on the group’s prospects remained intact, we take into account the recent price run-up on the stock. At this juncture, we believe that all the positives have been priced in. Hence, with limited upside to the share price, we downgrade the stock to “neutral” from “buy”.

Given the strong earnings results in 1HFY18, we opine that the current momentum of passenger traffic will continue to provide a strong base for incremental revenue generation moving forward. This will be supported by accommodative visa policies in Malaysia, leaving a positive impact on better inbound passengers’ traffic.

Core earnings grew 91% year-on-year (y-o-y), owing to the strong traffic flow in the international sector. For the second quarter ended June 30 (2QFY18), the group recorded core earnings at RM85.5 million, an increase of 29.5% y-o-y.

1HFY18 revenue rose 5% y-o-y. This was in line with the 5.2% y-o-y weighted average growth of passenger traffic in both Malaysia and Turkey in the period. Overall international traffic grew 8.3% y-o-y, showing robust demand of this particular segment. This was buoyed by continuous increase in traffic flow, attributable to supportive visa policy and healthy tourism landscape. On the domestic front, the Hari Raya holidays, which coincided with the two weeks mid-term school break, was the driver in 2QFY18.

The improvement of passenger traffic had positive impact on passenger service charge (PSC) and rental revenue which together constituted 59% of 1HFY18 total revenue. The PSC rate for international traffic is considerably higher compared to domestic traffic; hence a higher ratio of international traffic (at 53.3%) drove PSC revenue up 15.6% y-o-y for the group. Improvement in retail revenue led to positive rental reversion rates with rental revenue per sq m rising from RM6,000 to RM6,100 leading to 8.1% y-o-y increase in rental revenue.

We were also encouraged to see overall direct costs dropping by 4.4% y-o-y. This was a result of cost savings from direct labour (down 4.3% y-o-y) and direct overheads (down 6.5% y-o-y) in 1HFY18. Staff costs which represent the biggest chunk of operating expenses were lower, amounting to RM300.2 millon. The 2.9% y-o-y decline was due to writeback of bonus provision of RM21 million.

The management declared an interim dividend of five sen per share. It represents 34% of total core earnings per share in 1HFY18. — MIDF Research, Aug 29