This article first appeared in The Edge Financial Daily on September 13, 2017
Malaysia Airports Holdings Bhd
(Sept 12, RM9)
Downgrade to underperform with an unchanged target price (TP) of RM8.38: Eight months of financial year 2017 (8MFY17) passengers, including Istanbul Sabiha Gokcen International Airport (ISG), registered growth of 9.1% year-on-year (y-o-y), which is in line with our total Malaysia Airports Holdings Bhd’s (MAHB) passenger growth forecast of 9.2% (+10% for Malaysian operations; +7% for Turkey operations).
For August, MAHB’s passengers in Malaysia increased 9.4% y-o-y. International and domestic passengers were up 17.3% and 1.8% y-o-y respectively. The overall increase in international traffic was due to the haj travel season, the KL2017 Southeast Asian Games, visa relaxation for India and China, competitive fares and favourable exchange rate for foreign tourists. Average load factors were up 2.4 percentage points y-o-y to 77%.
In August, the Kuala Lumpur International Airport’s (KLIA) main terminal registered growth of 4.4% y-o-y with international passengers registering positive growth of 13.6%, while the domestic traffic contracted 21.6%. International growth was supported by increased seat capacity by airlines and stronger travel demand while domestic contraction was due to reduction in capacity by Malaysia Airlines, Firefly and Malindo Air. Meanwhile, klia2 traffic’s positive growth continued at 21.4% y-o-y (international: 20.0%; domestic: 24.2%), which we believe is attributable to strong growth from AirAsia and AirAsia X.
ISG airport’s passenger growth for August registered the sixth consecutive y-o-y growth in FY17 at +3.7% (international +10.1%; domestic +0.4%). We see encouraging growth registered for 8MFY17 in Turkey (+3.5% y-o-y YTD [year to date]) given that it had previously registered negative y-o-y growth since the negative streak of events, which had shaken Turkey since early FY16. That said, we note that our +7% target for Turkey might be a tall order vis-à-vis YTD growth of 3.5% given that domestic passenger growth in Turkey is still relatively volatile and a stable trend has yet to be established. Hence, we look to review our third quarter of FY17 numbers in October if any downward revision is needed.
We make no changes to our FY17E (estimate) and FY8E earnings forecasts as our underlying assumptions for FY17 passenger growth remain unchanged at 10% for Malaysia and 7% for Turkey.
Post traffic review, we downgrade MAHB to “underperform” with an unchanged TP of RM8.38 given that its share price had run up recently and we currently do not see further catalysts for room to upgrade. We note that our TP is based on FY18E forward price-to-book value of 1.74 times (+1.5 standard deviation [SD]). We believe our applied +1.5SD is fair given the better earnings prospects from the new PSC structure implemented since the beginning of FY17 and the operating agreement extension. We highlight that we are not using a +2SD for MAHB as we remain cautious given that there might be downward risks in our Turkey passenger growth forecast. Furthermore, we note that the only time MAHB has ever traded to its +2SD was in December 2013 when it rallied in anticipation of its 40% proposed acquisitions of ISG and LGM Havalimani Isletmeleri Ticaret ve Turizm. That said, its share price had retraced sharply post the announcement.
We believe rerating catalysts lie with: i) stronger-than-expected recovery in Turkey; and ii) higher-than-expected passenger growth in Malaysian operations. — Kenanga Research, Sept 12