This article first appeared in The Edge Financial Daily on January 10, 2020

Malaysia Airports Holdings Bhd
(Jan 9, RM6.98)
Maintain hold with a lower target price (TP) of RM7.50: We maintain our “hold” rating on Malaysia Airports Holdings Bhd (MAHB) with a lower sum-of-the-parts (SoP)-derived price target of RM7.50 (from RM8.50) after cutting our financial years 2020-21 (FY20-21E) earnings estimates by 8%-9% in anticipation of a prolonged deferment in the regulatory asset base (RAB) implementation, where there is also a high risk of cancellation. Operationally, the key earnings drivers (that is to say passenger movement growth, cost efficiency) remain positive and should support MAHB’s FY20-21E earnings growth; however, the protracted discussions on operating agreements (OA) remain a risk to earnings. MAHB’s share price has fallen by 18% over the past three months partly due to this. At 19 times FY20E price-to-earnings ratio (PER), MAHB’s valuation is comparable to global peers and looks fair.

Taking into consideration the proposed CAAM-Mavcom (Civil Aviation Authority of Malaysia-Malaysian Aviation Commission) merger and Mavcom’s press release, where its executive chairman Dr Nungsari Ahmad Radhi said he will now focus on the welfare of the staff and a responsible handover, we expect the implementation of the RAB to be deferred in the foreseeable future and see the risk of an outright cancellation as high. Separately, the discussions on OAs between MAHB and memorandum of transfer (MoT) are not forthcoming — the recent resignation of MAHB chief executive officer Raja Azmi Raja Nazuddin may further delay the finalisation or signing of the OAs.

Under the prevailing OAs, we now expect the Malaysian Passenger Service Charge (PSC) to stay flat in FY20-21E and MAHB to continue paying a rising user fee. While these are not detrimental to MAHB’s profitability, investors (including us) were expecting a higher financial return under the RAB framework. Elsewhere, MAHB will likely defer its infrastructure upgrades (That is to say baggage handling system, Aerotrain at Kuala Lumpur International Airport) and this may affect its operational efficiency.

We cut our FY20-21E earnings per share (EPS) by 8%-9% after reversing the financial impact of the RAB framework. This includes lowering our PSC and capital expenditure forecasts and raising the user fee projections. Operationally, MAHB’s business outlook remains healthy; we expect higher passenger movements, good cost efficiencies and lower finance costs for the Turkey business to drive a 3%-9% growth in MAHB’s FY20-21E EPS. We maintain our “hold” rating with a lower SoP-derived TP of RM7.50 (from RM8.50) after incorporating our earnings cuts and lowering our discount rate for the Malaysian operations in view of the lesser policy risk in relation to RAB. — Affin Hwang Capital, Jan 9