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This article first appeared in The Edge Financial Daily, on April 18, 2016.

 

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KUALA LUMPUR: Shares in Malaysia Airports Holdings Bhd (MAHB) have surged 55% since they bottomed in August last year. After the strong rebound in its shares, is there scope for a further upside on positive news flow like a 3.4% increase in first-quarter passenger numbers?

The stock has had a good run over the past five years, rising 67% from RM5.18 on April 15, 2011 to hit a high of RM8.63 on Dec 20, 2013. It fell to its lowest during the period to touch RM4.32 on Aug 28, 2015 before regaining its poise.

Year to date (YTD), MAHB shares have risen 19% to close at RM6.68 last Friday, giving a market capitalisation of RM11.08 billion. This compared with a 2.1% increase in the broader FBM KLCI Index.

Still, analysts who follow the stock are equally split between “buy”, “hold” and “sell” ratings, setting a 12-month consensus target price of RM6.05, which represents a 9.43% discount to last Friday’s closing price.

A worry is that the ringgit’s appreciation in recent weeks against the euro will have a dampening effect on its Turkish operation whose revenue and loans are denominated in euro. MAHB’s contributions from Turkey currently account for 30% of the group’s revenue.

YTD, the ringgit, Asia’s worst-performing currency last year, has regained some lost ground by climbing 6% to close at 4.3964 against the euro last Friday.

RHB Research regional transportation analyst Shekhar Jaiswal estimates that for every 10% appreciation in the ringgit against the euro would lower MAHB’s 2016 earnings before interest, taxes, depreciation and amortisation by 5% and its valuation by 3%.

Shekhar, however, remains bullish on MAHB’s Turkish operation, premised on the Istanbul Sabiha Gokcen International Airport (ISG) management’s plan to extend the existing airport terminal building, which could help increase the overall capacity of the airport up to 38 million passengers per year from 33 million passengers presently.

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He also noted that as part of ISG’s long-term capacity expansion plan, the airport operator intends to redevelop the old airport terminal building.

The development as per ISG’s management guidance, Shekhar said, would kick-start after construction of the airport metro station. He expects the redeveloped airport terminal building to be in operation in 2020.

“The move is expected to add 25 million passengers in capacity to ISG airport, bringing its total capacity to 63 million passengers per year,” he told The Edge Financial Daily over the phone.

The ringgit’s appreciation will also not bode well for the local tourism industry, as some analysts are of the view that Malaysia will become more expensive and may drive foreign tourists away.

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Last year, MAHB handled 0.5% more passengers in the country at 83.73 million from 83.35 million in 2014.

In its announcement last week, the airport operator said it is optimistic that its airport network will meet the estimated 2.5% growth for 2016, 

on the back of Malaysia Airlines Bhd’s improving performance and its code-share with Emirates.

“Similarly, Malindo Air’s expected code-sharing and interlining agreements with other foreign carriers would help, now that they have moved back to the Kuala Lumpur International Airport’s (KLIA) main terminal,” MAHB added.

Shekhar, however, is of the view that MAHB may fall short of its target this year, estimating that it may only achieve a 2.1% growth in passenger numbers.

“The rebound in ringgit may act a mild dampener for tourist arrivals. And based on the regional passenger traffic numbers, Chinese tourists do seem more willing to open their wallets in Thailand, Japan and even Australia, although Malaysia has offered a visa waiver between March and December this year,” he explained.

Echoing the same sentiment, TA Securities Research analyst Tan Kam Meng said the impact of the visa waiver for Chinese tourists is insignificant as it only ensures Malaysia competes on an equal footing with countries that have already implemented the move.

Nevertheless, he is slightly bullish, projecting MAHB’s passenger movement to grow by 2.7% this year.

“Although we expect MAHB to meet its growth target for 2016, it will not be a rerating catalyst as it is not a tall order to achieve. However, it would be a derating catalyst if it fails to achieve the 2.5% growth,” said Tan.

Tan believes MAHB’s upside is limited and has downgraded his recommendation to “sell” with a RM7.02 target price.

Meanwhile, Shekhar noted that the extension of MAHB’s concession agreement with the government to operate KLIA has to be closely monitored.

MAHB is currently negotiating with the government to formalise an extension of the concession agreement to 2069. MAHB;s existing concession contract will expire in 2034, and Putrajaya has an option to renew the contract by 25 years to 2059.

“In case MAHB does not get the additional 10 years of extension that it is negotiating for, we estimate that its value would fall to RM6.32 per share,” he said.

Meanwhile, all analysts believe that the increase in air navigation facility charges by the Department of Civil Aviation (DCA) is unlikely to affect the demand for travel and MAHB.

JP Morgan Research in a report dated April 6 said the DCA’s fees hike by 10 times is not significant enough to derail its positive view on MAHB.

“MAHB remains one of our top country picks for exposure to rising tourism, low-cost travel demand, and rising free cash flow yields,” it said, pointing out that the upcoming catalysts may include resumption in recovery in KLIA passenger growth, better dividend guidance, and potential KLIA concession extension.

For the financial year ended Dec 31, 2015 (FY15), MAHB’s net profit slumped 94% to RM37.84 million from RM662.37 million a year ago, but revenue rose 16% to RM3.87 billion from RM3.34 billion in FY14.

Shekhar is projecting MAHB to post a net profit of RM66 million and RM166 million in FY16 and FY17 respectively (both numbers exclude the RM57.5 million of interest paid towards perpetual sukuk), on the back of RM4.22 billion and RM4.4 billion in revenue.

TA Research’s Tan, meanwhile, is targeting MAHB to achieve a net profit of RM178.4 million on revenue of RM4.17 billion in FY16.

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