MAHB’s earnings seen lower amid higher operating costs for klia2

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Malaysia Airports Holdings Bhd (MAHB)
(Oct 27, RM7.41)
Maintain “neutral” with target price (TP) of RM7.46:
We maintain our “neutral” view on MAHB’s move in taking full control of Turkey’s Sabiha Gocken International Airport (ISGA) despite the long-term growth prospect. Our main concern on its overseas operations is due to the absence of a local partner coupled with high foreign exchange risk.

We also reduced our financial year 2014 to financial year 2015 earnings (FY14 to FY15) by 35% to 33% to RM169.5 million to RM183.2 million respectively as we further factored in higher operating cost for klia2 as we upkeep our earnings model as previous assumptions were overly conservative.

Subsequent to our revision in earnings, we also lowered our sum-of-parts-based TP by 7.4% from RM8.06 to RM7.46 as we rolled forward to FY15, while keeping our “market perform” call.

The management remains confident in the long-term prospect of ISGA as it is operating in one of the most important hubs regionally and globally. ISGA is also already benefiting from the spillover impact from the overcrowding situation in Istanbul Ataturk Airport.

However, our major concern about MAHB’s move in taking full control of ISGA is largely on its operations in Turkey due to the absence of a strong local partner. While the management is still exploring all available funding options, it also highlighted that it might consider the funding option through 100% debt even if it would risk its triple A credit rating should the need arise.

However, based on our 50:50 debt to equity assumptions, we opine that MAHB could still maintain its gearing at 0.7 times level without the need for equity by funding its 50% equity portion with perpetual bonds, which we believe could be a better option, as it would not be dilutive to its shareholders and also being able to maintain its triple A credit rating.

We did not consolidate the accounts for ISGA to capture the remaining 40% stake at this juncture as the acquisition is yet to be completed. — Kenanga Research, Oct 27

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This article first appeared in The Edge Financial Daily, on October 28, 2014.