MAHB 6M passenger growth seen within expectations

This article first appeared in The Edge Financial Daily, on July 12, 2018.
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Malaysia Airports Holdings Bhd
(July 11, RM8.80)
Maintain market perform with an unchanged target price (TP) of RM8.60:
Malaysia Airports Holdings Bhd’s (MAHB) six months of 2018 (6M18) passengers (including Istanbul Sabiha Gokcen International Airport [ISG]) registered growth of 5.2% (+3% for Malaysian operations and +12.4% for Turkey operations) year-on-year (y-o-y), which we deem in line with our total growth forecast of 8.5% (+8% for Malaysian operations; +10% for Turkey operations) as we see stronger growth numbers in the month boosted by festive seasons, such as the Hari Raya holiday season.

 
For June, passengers in Malaysia grew 9.7% y-o-y (international: +8.3%; domestic: 11.1%). Hari Raya was the main driver of the growth in June passenger traffic. That said, the two weeks of school holidays, which coincided with Hari Raya, were also one of the factors for the boost in traffic.

In June, Kuala Lumpur International Airport (KLIA) Main grew 6.7% y-o-y with international and domestic traffic increase by 7.3% and 4.5%, respectively. Klia2’s positive traffic growth continued, at 12.5% y-o-y (international: 6.5%; domestic: 25.2%), mainly driven by the festive season as mentioned above.

As for klia2, it was partly attributable to growth from AirAsia Group Bhd as it increased its capacities through higher plane utilisation as well as the number of planes.

ISG’s passenger growth for June 2018 grew 9.1% (international: +12%; domestic: +7.7%) y-o-y, also due to similar reasons mentioned above. Its 6M18 passenger traffic continued to grow at an encouraging pace of 12.4%.

It was reported in the news that the Malaysian Aviation Commission’s (Mavcom) chairman would be replaced, but we believe that the anticipated Quality of Service (QoS) framework will still be implemented by Mavcom in 3Q18 for airports (starting with KLIA and klia2) with objectives to achieve higher QoS for passengers.

This could pose as downside risks for MAHB’s earnings given that Mavcom has proposed a financial penalty of up to 5% of aeronautical revenue, which could dent our financial year ending Dec 31, 2018 estimate (FY18E) core net profit by 7% for every 1% penalty.

That said, in order to mitigate penalties, MAHB has increased its planned capital expenditure (capex) to RM600 million to RM700 million (from typically RM300 million) in FY18 and FY19 to upgrade its infrastructure, such as trains, baggage systems and toilets.

Post review, we maintain FY18E and FY19E earnings.

Our TP is based on price-to-book-value (P/BV) of 1.72 times P/BV, which is pegged at +0.5SD to its two-year average. We think our applied +0.5SD level is reasonable given the recovery of passenger traffic at Turkey on the back of ISG’s terminal capacity expansion by 2H18.

Risks to our call include lower-than-expected passenger growth, and unexpected epidemic/terror attacks. — Kenanga Research, July 11