This article first appeared in The Edge Financial Daily, on April 19, 2016.

Malaysia Airports Holdings Bhd
(April 18, RM6.50)
Maintain buy with a higher target price (TP) of RM7.50: Malaysia Airports Holdings Bhd (MAHB) recorded a passenger movement growth of 3% year-on-year (y-o-y) in the first quarter of 2016 (1Q16), despite a 20% to 30% capacity cut by Malaysia Airlines Bhd since the second half of 2015 (2H15), pointing to a recovery in air travel demand (travelling with other local and international airlines).

The drop of 0.7% y-o-y in March was mainly due to timing of the Formula One event, which took place in March 2015 versus October 2016.

We expect a passenger growth of 6% y-o-y for financial year 2016 (FY16), as we expect stronger growth towards 2H16, from normalisation of impact from Malaysia Airlines’ capacity rationalisation (since 2H15) and continued recovery of air travel demand.

Malaysia Airlines’ capacity rationalisation is being replaced by its code-sharing with Emirates, additional capacities by local airlines and foreign airlines, as well as new airline entries (British Airlines, All Nippon Airlines, China Airlines and VietJet Air).

Concerns about the Kuala Lumpur International Airport (KLIA) main terminal building being cannibalised by klia2 is likely to ease off, with Malaysia Airlines gradually regaining its position, increasing capacity of foreign full-service carriers and the transfer of Malindo Air’s operation into the KLIA main terminal building from klia2.

Under its second five-year strategic plan, Runway to Success 2020, MAHB continues to focus on the growth of non-aeronautical earnings with the development of KLIA Aeropolis — a landside commercial development of 6,600 acres (2,671ha). For the past few years, there were several developments in areas surrounding KLIA (Putrajaya, Nilai, etc), which will enhance the value of KLIA Aeropolis.

The Istanbul Sabiha Gokcen International Airport (ISGA) continued to record a strong passenger growth of 19.7% y-o-y in 1Q16, after 20.3% y-o-y in FY15. ISGA is expected to hit its current terminal capacity of 33 million pax per annum within another one to two years, due to strong growth.

Management is spending €20 million (RM88.73 million) in capital expenditure for capacity expansion to €41 million by 2018. Given the strong growth, we believe ISGA needs to develop another terminal building by 2020 to 2021, which may extend its concession further from the current period ending 2030.

Risks include a world crisis (war, tourism or an epidemic outbreak), shutdown of KLIA and klia2, and the development of high-speed train between Singapore and Pulau Pinang.

After imputing numbers from the annual report, we adjusted FY16 to FY18 earnings by 3.1%, -0.3% and 1.3% respectively.

Positives include monopoly of airport operations in Malaysia (except Senai); MAHB being the main beneficiary of government initiatives to boost tourism; a concession extension for another 35 years to 2069; MAHB being unaffected by the ringgit’s depreciation; and potentially higher non-aeronautical revenue.

Negatives include low liquidity.

We maintain our “buy” recommendation with a higher TP of RM7.50 (from RM6.80), based on discounted cash flow equity, after we rolled forward our valuation into FY17, coupled with stronger cash flow expectations. We expect MAHB to declare higher dividends going forward. — Hong Leong Investment Bank Research, April 18