This article first appeared in The Edge Financial Daily on January 4, 2019

Malaysia Airports Holdings Bhd
(Jan 3, RM8.25)
Maintain buy with an unchanged target price of RM9.88: Malaysia Airports Holdings Bhd (MAHB) announced that it had terminated its plan to sell its 11% stake in GMR Hyderabad International Airport Ltd (GHIAL) to GMR Airports Ltd for US$76.1 million or approximately RM314.6 million.

The automatic termination of the share purchase agreement was caused by the failure of GMR Airports to complete their obligation in accordance with the terms of the agreement by Dec 31, 2018.

The gain from the disposal was estimated to be RM255.1 million.

Should MAHB have the opportunity to utilise this gain to pare down its debt, MAHB’s net gearing ratio could have been decreased from 0.32 times to 0.29 times as of Sept 30, 2018, while enabling MAHB to reduce finance costs by approximately 8.9% per year.

Notwithstanding this, we believe that the current net gearing level of MAHB is still manageable.

While the termination puts a hold on the unlocking of MAHB’s investment in India, we opine that MAHB could still leverage on its stake in GHIAL to attract more Indian-based airlines moving forward as part of its global transit network.

Recall that in November 2018, the commencement of flights of Indian low-cost airline IndiGo Airlines to klia2 partially contributed to the 3.9% year-on-year growth in international passengers, the largest in three months, pushing the load factor to 77.8%, 1.7 percentage points higher than a year ago.

Therefore, we do not discount the possibility of more flight arrangements with IndiGo Airlines as it had commanded a market share of 43% in India as of November 2018, making it India’s largest passenger airline.

Since the proposed divestment was yet to be completed, we did not make any adjustments to our earnings estimates previously. Hence, we have maintained our earnings forecasts for financial year 2018 (FY18) and FY19 following the termination of the divestment plan.

We believe that MAHB is riding on a positive trajectory based on its latest passenger data.

Moreover, we expect MAHB’s efforts in not only attracting more new airlines but also offering increased connectivity to weigh on the effects of the departure levy set to be imposed in June 2019 for outgoing international passengers.

For instance, TUI Airways commenced their first flight from Birmingham to Langkawi in December 2018.

We also believe the overall tourism initiatives outlined in Budget 2019 could uphold demand and support the overall load factor of MAHB’s airports.

Positive drivers of MAHB include: i) the expansion of international passengers in Malaysia; and ii) capacity expansion and entry of new foreign airlines, catering to long-term structural demand for air travel. — MIDF Research, Jan 3