This article first appeared in The Edge Financial Daily, on January 14, 2016.

Malaysia Airports Holdings Bhd
(Jan 13, RM5.70)
Maintain buy with a target price (TP) of RM6.35: Passenger traffic at Malaysian airports decreased 2.7% year-on-year (y-o-y) in December 2015, mainly due to capacity cuts by Malaysia Airlines Bhd (Malaysia Airlines). This has yet to be fully replaced by other airlines, given the short time frame. Recall that Malaysia Airlines, which has a 33% market share of Malaysia’s air travel traffic, had both cut its capacity and discontinued various services in restructuring its business. We believe that the declines are temporary as historically, other airlines have responded by adding the withdrawn capacity within a few months. 

Our view is also supported as demand remains strong as seen in December’s load factors of 79.3% (highest in two years). Moving into 2016, we expect new capacity from Emirates to help replenish traffic growth with its 90-city (spanning the United States, Europe, Middle East and Africa) code-sharing agreement with Malaysia Airlines. Meanwhile, Emirates will also gain access to Malaysia Airlines’ domestic and regional routes, creating a win-win-win situation for Malaysia Airlines, Emirates and Malaysia Airports Holdings Bhd (MAHB).

Strong passenger traffic growth for Istanbul Sabiha Gokcen International Airport (ISG) continues: Including ISG, MAHB’s total passenger traffic growth grew 1.9% y-o-y for the month of December 2015. ISG continued to display an impressive 22.4% y-o-y growth, despite terrorist threats in the country due to conflicts in Syria as travel demand remains buoyant. Cumulative 12 months’ growth (19.7%) exceeds the management’s 2015 growth forecast for ISG of 15% y-o-y, prompting management to forecast a higher 20% growth in 2016 against our forecast of 15% due to geopolitical risks. Twelve months ending Dec 31, 2015 (12MFY15) cumulative passenger traffic for MAHB was still in positive territory, registering growth of 0.5% y-o-y.

For 2016, management has targeted a lower 2.5% growth target, while we are slightly more optimistic forecasting 3% growth. We maintain our “buy” call on MAHB with a TP of RM6.35. Our call is premised on earnings rebound in third quarter ended Sept 30, 2015 (3QFY15) likely to continue in 4QFY15, better contributions from ISG, which has turned a profit albeit being partially offset by fair value amortisations of concession rights, which are non-cash; cost-cutting initiatives implemented in Malaysian airports to keep operating costs in check. Our valuation is based on a discounted cash flow method (weighted average cost of capital: 7.7%, Beta: 1.1). — MIDF Research, Jan 13