Malaysia Airports Holdings Bhd
(Mar 23, RM7.05)
Maintain hold with target price (TP) of RM6.60: Malaysia Airlines (MAS) plans to cut capacity by 10% in 2015, and gradually grow capacity by 6% to 8% per annum (pa) for domestic and Asean routes, and 5% pa for Asia-Pacific routes thereafter. Meanwhile, AirAsia Bhd has plans to shrink its Malaysia-based fleet to 75 aircraft by end-2015 (financial year 2014 ended December [FY14]: 81), and only allocate one or two new aircraft to its Malaysian fleet going forward. 

AirAsia X is expected to grow capacity by only 5% pa in 2015/16. Given the airline’s tepid capacity growth plans, we cut our passenger traffic growth assumptions for the group’s Malaysian operations to 3% for FY15, and 5% for both FY16 and FY17 forecasts (previous: 7%/6%/6%).

Sabiha Gokcen International Airport’s (ISG) net loss narrowed significantly in the second half of 2014 (2H14) (€3 million against €20 million in 1H14), and is on track to turn around in FY15F. This is underpinned by interest cost savings from debt refinancing, and the forecast strong passenger traffic growth. We expect ISG to be a significant earnings contributor to the group (about 26%) from FY16F onwards.

We cut FY15/16F earnings by 27% and 17%, after imputing: (i) lower Malaysian passenger traffic forecasts; and (ii) other housekeeping adjustments. 

Despite trimming earnings, we raise our sum of parts-based TP to RM6.60 as we reduce the weighted average cost of capital for the Malaysian operations to 7.9% (previously 8.5%) following changes in capital market assumptions. Potential rerating catalysts include stronger-than-expected turnaround of ISG and passenger service charge hike for klia2. — AllianceDBS Research, March 23

This article first appeared in The Edge Financial Daily, on March 24, 2015.