This article first appeared in The Edge Financial Daily, on October 9, 2015.

Malaysia Airports Holdings Bhd
(Oct 8, RM5.40)
Maintain hold with an unchanged target price (TP) of RM5.43: Malaysia Airports Holdings Bhd’s (MAHB) stock has declined close to 40% since peaking in late 2013 due to a variety of factors, including capacity cuts and a network rationalisation of major airlines in Malaysia, the step-up in costs after the commissioning of klia2 from May 2014, and a dilution from two equity issues in 2014 and 2015.

Passenger traffic at MAHB’s Malaysian airports grew just 1.9% on-year for the cumulative eight months in 2015, against 4.7% growth in 2014 and 18.4% growth in 2013.

The strong 2013 traffic growth was driven by the entry of Malindo Air from March 2013, which triggered a strong capacity response from incumbents Malaysia Airlines (MAS) and AirAsia.

Demand responded enthusiastically to the decline in domestic airfares.

A much slower pace of passenger traffic growth last year was caused by the MH370 and MH17 incidents, which discouraged tourist inflows into Malaysia, coupled with airlines reigning in capacity growth to limit the fare deterioration.

This continued into 2015, and MAS began cutting its capacity earnestly from August onwards. Looking into 2016, the weaker ringgit will likely discourage Malaysian outbound tourists, leading to weak passenger traffic growth forecasts of less than 5%.

The opening of klia2 from May 2014 caused operating and interest costs to surge from a quarterly average of RM540 million in 2013 to almost RM700 million in the past four quarters.

This could not be recouped given the weaker traffic growth, even with government compensation from February 2014 onwards equivalent to about 10% of the current passenger service charges (PSC). 

Our financial year 2015 (FY15) core earnings forecasts are 70% lower than the peak in FY12, while our FY15 core earnings per share forecasts are 77% lower given the two equity issues in 2014 and 2015.

We expect MAHB’s earnings to bottom out in 2015, and recover gradually thereafter with a slow passenger volume expansion. MAHB’s share price has probably also hit bottom, as it is currently being valued at a price-to-book value of only 1 time.

The ultimate prize is the eventual raising of klia2’s PSC to close the current gap with the PSC at the Main Terminal Building.

This can enhance earnings substantially and lift our TP to above RM7. — CIMB Research, Oct 8