This article first appeared in The Edge Financial Daily on November 14, 2017

Malaysia Airports Holdings Bhd
(Nov 13, RM8.29)
Maintain sell recommendation with a target price of RM8.47: Malaysia Airports Holdings Bhd’s (MAHB) October operating data continued to reflect the favourable travel sentiment underpinned by visa relaxation and currency advantage.

The international passenger movement surged 13.1% year-on-year (y-o-y) in October to four million passengers. However, the growth in the domestic segment stuck at a tepid 1.3% at 3.8 million in October. We attribute this to a high base effect. All these have resulted in a total passenger growth of 7% y-o-y in October, higher than the September’s y-o-y growth of 3.6%.

On a cumulative basis, the growth in passenger movement moderated slightly to 9.2% in October from 9.4% a month ago. This was higher than our growth projection of 6.7% and MAHB management’s guidance of 6.5%, considering the remaining two months of operations, which are expected to be strong for the international segment.

According to MAHB’s announcement, international growth was mainly contributed by the Northeast Asia, South Asia and Southeast Asia sectors. Largest increases in traffic were attributed to sectors including China, India, Indonesia, Thailand, Taiwan, Singapore, Vietnam, South Korea and Japan.

Istanbul Sabiha Gokcen (ISG) airport recorded a 6.6% y-o-y (-6% month-on-month) growth in passenger movements to 2.8 million passengers. This was driven by both the international (+10.3% y-o-y) and domestic (+4.9%) segments.

The increase in passengers has contributed to a higher cumulative 10-month period of 2017 growth of 4.3% versus 4% last month. We maintain our growth projections of 7.2% for 2017, in line with management’s guidance.

The operating environment is now clouded with the surging price of crude oil, which would tend to reduce an airline’s income. However, at the current crude oil price levels (less than US$100 [RM419] per barrel), we do not think airline companies would start to impose surcharges, which may affect travel sentiments.

As such, we believe passenger movement in Malaysia would remain robust in 2018, underpinned by additional capacity from AirAsia Bhd, and a short-term one-off impact of the 14th general election in Malaysia.

We raise our financial year 2017 (FY17) to FY19 earnings projections by 12.9%-14% after revising the FY17-FY19 passenger growth assumptions. Following the earnings upgrade, we raise our discounted cash flow valuation to RM8.47 per share (from RM8.10 per share) based on an unchanged discount rate of 11.7%.

MAHB remains expensive at a forward price-earnings ratio of 51 times and we believe the market has fully priced in those positive catalysts including earnings recovery, concession extension, possible sale of minority stake in ISG and special dividends. — TA Securities, Nov 13