This article first appeared in The Edge Financial Daily, on October 29, 2015.

Malaysia Airports Holdings Bhd
(Oct 28, RM5.32)
Maintain underperform with a lower target price (TP) of RM5.24: Malaysia Airports Holdings Bhd (MAHB) continued to register core net loss of RM35.1 million, which came below both our and consensus expectations.  

The disappointment in earnings is still mainly due to its higher-than-expected operating costs. The main drag on its profitability stemmed from higher staff costs (+23%), depreciation and amortisation (+88%), and higher financing costs (+472%) since the start of klia2 and the full consolidation of Sabiha Gokcen International Airport.

The higher-than-expected costs were also the result of the weaker ringgit in the third quarter ended Sept 30, 2015 (3QFY15) for its overseas operations.

No dividend was proposed for 3QFY15 as expected. Year-on-year, MAHB registered a net profit of RM80.4 million (-6%) for the nine-month period (9MFY15). However, should we reverse all the one-off gains and write-backs, MAHB would have registered a core net loss of RM35.1 million compared to a core net profit of RM151.3 million for 9MFY14.

Quarter-on-quarter, MAHB managed to register a core net profit of RM13.3 million in 3QFY15 compared to a core net loss of RM16.9 million in 2QFY15 underpinned by 8% growth in revenue. MAHB also managed to bring down its major financing costs by 9% due to the settlement of its revolving credit, coupled with a positive tax of RM9.7 million registered in 3QFY15 due to investment tax allowance benefits.

We maintain our cautious view on MAHB’s outlook due to its high operating costs, and potentially slower passenger traffic growth than management’s already conservative passenger traffic forecast of 85.8 million pax for 2015.

We further reduce our FY15 to FY16 estimate earnings to core net losses of RM57.0 million and RM27.8 million, respectively, as we factor in higher operation costs.

We reiterate our “underperform” call with a lower TP of RM5.24 (previously, RM5.90) that is based on sum-of-parts, following our downward revision in earnings. The rerating catalyst for MAHB lies in its ability to further bring down its operational costs to be operationally efficient, coupled with a stronger-than-expected traffic growth. — Kenanga Research, Oct 28