This article first appeared in Corporate, The Edge Malaysia Weekly, on April 18 - 24, 2016.

MALAYSIA Airport Holdings Bhd (MAHB) appears to have a lot on its plate of late.

Judging from the newsflow, MAHB is busy with issues ranging from a faulty aerotrain that connects the Kuala Lumpur International Airport (KLIA) to the satellite building, to key customers pulling out of its main terminal. Just last week, a RM456 million arbitration notice from a fuelling service provider was unexpectedly sprung on the airport operator. That came before the dust has settled on the sudden announcement of a hike in avaiation fees by the Department of Civil Aviation.

Amid the noise, investors have remained unmoved. MAHB’s share price has been well supported, regaining most of the value lost in the global equities selldown last August. This year alone, the share price has climbed 19.07% to last Friday’s close of RM6.68, for a market capitalisation of RM11.08 billion. Analysts’ ratings on the stock are evenly split between “buy”, “sell” and “hold” calls while 12-month target prices fall within a wide range of RM6.05 to RM6.57, according to Bloomberg data. Most dismiss the negative newsflow so far as “non-events”.

Analysts say developments within the domestic aviation industry could add to uncertainty but would not derail MAHB from meeting the key performance targets set for its financial year ending Dec 31, 2016 (FY2016) or its long-term performance.

For FY2016, the airport operator wants to achieve earnings before interest, taxes, depreciation and amortisation (Ebitda) of RM1.72 billion, an improvement from 2015’s RM1.57 billion. At the same time, passenger traffic of its Malaysia operations is expected to grow to 86 million, or 2.5% above last year’s passenger numbers, while the Turkish operations should continue to register double-digit growth in 2016.

MAHB’s FY2016 targets have come after what some would consider a lacklustre FY2015. The consolidation of the operations of Istanbul Sabiha Gokcen Airport (ISG) last year led to core losses of RM3.6 million due to non-cash amortisation cost of RM182.2 million being recognised.

Mohshin Aziz, an analyst from Maybank IB Research who has a “sell” call on MAHB, says in a Feb 18 note that the outlook for the company is “uninspiring”, citing lacklustre traffic growth and rising costs.

“Its earnings growth outlook is uninspiring when compared against its own history. MAHB was churning core net profit of RM400 million to RM500 million per annum prior to the completion of klia2 and acquisition of ISG. We forecast that it will take MAHB another two to three years for its core net profit to revert to the RM400 million to RM500 million per annum levels,” he writes.

Others who are more sanguine say MAHB’s targets seem modest, and are “neither a tall order nor a re-rating catalyst”, as one analyst puts it. But the conservative projections do reflect the airport operator’s appreciation of the subtle shift in the aviation industry and more subdued global macroeconomic environment.

The restructuring of Malaysia Airlines Bhd (MAB) and its unilateral capacity rationalisation seems to have had destabilising effects on MAHB’s passenger growth numbers. The national airline accounted for 27% of MAHB’s passenger movements in 2015. In FY2015, passenger movements at KLIA’s main terminal fell 9.2% to 22.6 million passengers (international passengers fell 7.4% and domestic, 14.9%). This was cushioned by passenger traffic at klia2, which rose 9.5% to 26.3 million last year. The trend has continued to 1Q2016, with passenger traffic at KLIA falling 10.8%. However, passenger traffic in Malaysia still grew 3.4% and overall passenger traffic for MAHB (including its Turkish operations) rose 6.9%.

Coupled with news that Lufthansa (Europe’s largest airline by passenger numbers) has pulled out of KLIA and of Air France’s termination of its Paris-Kuala Lumpur route, some quarters fear the declining passenger numbers at KLIA is a sign that the country’s largest airport is falling behind its regional peers. Already, Thailand’s Don Mueang International Airport has overtaken klia2 as the region’s busiest low-cost carrier airport.

Hong Leong Investment Research analyst Daniel Wong tells The Edge that the MAB effect will normalise in the second half of the year. Passenger traffic numbers should improve in 2H2016 as Malindo Air moves to KLIA. The partnership between MAB and Emirates should also increase KLIA’s connectivity to Europe and the Middle East and boost passenger numbers again.

An industry expert explains, “Malindo Air has very exciting plans after moving to KLIA. It has launched new international routes and has plans for code-sharing agreements to expand its reach. This is positive for MAHB because the main terminal commands higher charges and connectivity improves passenger traffic.

“Lufthansa and Air France are pulling out for their own reasons. Europe accounts for 4% to 5% of MAHB’s total passenger movement in 2015. It will decline to around 3% due to recent developments but traffic to and from the Middle East (at 7.6% in 2015) should make up for it with the MAB-Emirates tie-up,” he adds.

Further, existing customers like British Airways and Turkish Airlines are expected to increase frequencies in mid-2016.

This should prove to be reassuring for investors. It is also comforting to note that KLIA does not shoulder the responsibility of driving passenger traffic alone. MAHB has been working towards growing the prominence of its secondary international airports at Penang, Kota Kinabalu, Kuching and Langkawi as international gateways. Collectively, these airports account for 5.6% and 4.1% of the passenger traffic of MAHB’s Malaysian and overall airport operations respectively in 2015.

“We are beginning to see a slight shift in MAHB’s approach, plugging leakages in traffic. Over the last year, it has been trying to improve connectivity in secondary hubs, getting more airlines to ply international routes without going through KLIA. International routes are more lucrative whereas domestic routes are somewhat subsidised,” says an analyst.

“Opening the secondary airports up will probably upset the domestic duopoly of AirAsia and MAB. But, it will be beneficial to MAHB and the industry’s growth,” he adds.

The Penang International Airport and the Kota Kinabalu International Airport have both undergone upgrades and are now seeing increased international connectivity. It is understood that as many as four new foreign airlines will start flying out of Kota Kinabalu this year. Meanwhile, the AirAsia Group has opted to develop Langkawi as its sixth hub, with direct flights to Guangzhou and Hong Kong already launched.

“The newsflow lately can be a distraction but I think that things will improve towards 2H16. I have a ‘buy’ on the company. To me, what is important is that the company has strong cash flow that covers its operating expenditure and capital expenditure, and meet its dividend commitments to shareholders. MAHB has always done that,” says Wong.

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