This article first appeared in The Edge Financial Daily, on May 3, 2016.

Malaysia Airports Holdings Bhd
(April 29, RM6.70)
Maintain buy with an unchanged target price (TP) of RM7.50: In the first quarter of 2016 (1Q16), passenger traffic growth was stronger than Malaysia Airports Holdings Bhd’s (MAHB) target for financial year 2016 (FY16). MAHB recorded a 3.4% growth year-on-year (y-o-y) versus a target of 2.5%, while Istanbul Sabiha Gökçen International Airport (ISGIA) recorded a growth of 19.6% y-o-y versus its target of 10.8%. MAHB does not expect further capacity cuts by Malaysian Airlines Bhd, while AirAsia Group and Malindo Air as well as foreign airlines are expected to increase capacities, especially towards the second half of 2016, which bode well for MAHB’s earnings growth from aeronautical and non-aeronautical segments.

The movement of Malindo Air’s operations into Kuala Lumpur International Airport’s (KLIA) Main Terminal from klia2 (since mid-March 2016) will further improve MAHB’s earnings, via the higher tariff charges and marginal cost support collections in KLIA’s Main Terminal. The movement of AirAsia’s operations from Kota Kinabalu’s low-cost carrier terminal (LCCT) to Kota Kinabalu International Airport since December 2015 will also contribute to stronger earnings in FY16.

There is an increasing traffic at the China sector due to normalisation impact from the MH370 and MH17 incidents back in 2014. The tourism ministry is working towards promoting Malaysia in China’s market with various programmes, reinforced by easing of visa applications and visa waiver. There is also an increasing connectivity in China as both local and foreign airlines increase capacities, frequencies and new routes. Growth is expected to be in double digits for the China sector (contributing around 10% of total traffic).

ISGIA recorded a minor loss of €3.8 million (RM17 million) in 1QFY16 (seasonally the weakest quarter of the year). With the continued strong double-digit passenger growth, ISGIA is expected to start turning around (excluding consolidated amortisation of €11.6 million per quarter) and to contribute positively to MAHB’s bottom line from 2QFY16 onwards. ISGIA is spending €20 million to expand its capacity to 41 million passengers per annum (currently 33 million) by 2018 (concurrent with the completion of an additional runway, which is borne by Turkey’s government), given its current high utilisation rate of about 85%.

Risks to MAHB include world crisis (war, terrorism and epidemic outbreak); shutdown of KLIA and klia2; and the development of high-speed rail between Singapore and Kuala Lumpur. Our forecasts are unchanged, with a “buy” rating. Its positives are: i) monopoly of airport operations in Malaysia (except Senai International Airport); ii) main beneficiary of government’s initiatives to boost tourism; iii) concession extension for another 35 years to 2069; iv) unaffected by ringgit’s depreciation; and v) potentially higher non-aeronautical revenue.But its negative is its low liquidity.

We maintain our “buy” recommendation with an unchanged TP of RM7.50 based on discounted cash flow to equity. 

We remain positive on MAHB’s outlook on the back of air travel recovery in Malaysia and its continued strong growth in Turkey, as well as the long-term growth from commercial land development KLIA Aeropolis. — Hong Leong Investment Bank Research, April 29