MAHB on passenger growth trend

This article first appeared in The Edge Financial Daily, on June 19, 2017.
MAHB on passenger growth trend
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Malaysia Airports Holdings Bhd
(June 16, RM8.79)
Maintain buy with a higher target price of RM9.80:
Year to date (May), Malaysia Airports Holdings Bhd (MAHB) has achieved a strong passenger traffic growth of 11.8% year-on-year (y-o-y) for the Malaysia operations.

 We expect the positive trend to continue this year, driven by growing tourist arrivals and resilient air travel demand by locals as well as capacity expansion by major Malaysia-based airlines.

The growth was driven by non-Asean international traffic — which is positive for MAHB — on higher tariff rates of RM50 to RM73 per pax and higher average retail spending per pax.

 We have imputed a high passenger traffic growth of 8% y-o-y for this year (versus MAHB’s targeted 6.5% y-o-y), even after taking into account the higher base effect in the second half of this year.

 The management has guided the upcoming capital expenditure (capex) of RM1.5 billion to RM2.5 billion (lower than Hong Leong Investment Bank’s initial assumption of RM3 billion) to increase the capacity of the Kuala Lumpur International Airport’s (KLIA) main terminal building to 40 to 45 million passengers per annum (mppa) (from 30 mppa), given the current high utilisation rate of above 90%.

 However, the construction is only expected to start in the 2018-2019 period, after MAHB finalises the terms of marginal cost support (MARCS) and concession extension with the government.

 MAHB will remain focused on developing the KLIA Aeropolis to boost its non-aeronautical revenue, by leveraging the expected strong passenger traffic growth (from the current 52 mppa to 100 mppa by 2030).

 MAHB will continue to implement its existing business model on developing the KLIA Aeropolis through lease income, share of profits and concession fees. Both initial investment in the Mitsui Outlet Park and klia2 Gateway since 2010 have started to bear fruits with a positive contribution last year.

 Recent developments include land lease to logistics and maintenance, repair and overhaul (MRO) players. The terms of contracts are not yet concluded.

The Istanbul Sabiha Gokcen International Airport (ISGIA) has been reporting positive growths in recent months (March to May), after drops since the middle of last year. ISGIA believes Turkey is in a better position now with a more stable government and better prospects for the tourism industry.  

We are further encouraged with the operational cash flow self-sustaining competence of ISGIA. MAHB is currently in talks to monetise parts of its investment in ISGIA (the selling of its minority stake), which may further improve MAHB’s cash flow.

Risks include world crises (war, tourism and outbreaks of epidemics), shutdown of KLIA and klia2, and the development of the high-speed rain between Singapore and Penang.

 We raised our profit forecasts for the years 2017 to 2019 by 5.1%, 3.9% and 4% respectively.

 MAHB is expected to be the major beneficiary from the growth of air travel demand in Malaysia as well as the ongoing land development initiatives under the KLIA Aeropolis Masterplan. The recovery of ISGIA traffic in recent months will improve its outlook and monetising of its investment will unlock its valuation. — Hong Leong Investment Bank Research, June 16