Malaysia Airports Holdings Bhd
(Dec 15, RM6.61)
Maintain “buy” and raise target price to RM8.05. MAHB’s joint-venture company Malaysia Airports Consultancy Services Middle East LLC (MACS ME) has won a letter of award from the New Doha International Airport Steering Committee to provide airport special systems repair and maintenance services at Hamad International Airport.

MACS ME is 51% owned by Watad Group Enterprises LLC (MAHB: 49%).

The three-year RM192.1 million contract comes with a two-year extension option. This is the group’s second contract win from the airport.

We assume the job will fetch a 20% net margin, which effectively translates into RM6 million annual contribution to earnings (on its stake) over the next five years.

MAHB’s Nov 2014 traffic dropped by 2.6% year-on-year (y-o-y), year-to-date +5.2%, better than management expected.

We expect December traffic to drop by a similar quantum y-o-y, with ending 2014 passenger traffic to grow at 4.37% (from our earlier 4%).

We expect financial year 2015 (FY15) traffic growth to be unchanged at 6% and FY16 at 5%, as the shaky consumer sentiment on the implementation of the goods and services tax (GST) could cap the upside to growth.

We also lower our 2014 aircraft traffic growth estimate to 7.2% y-o-y from 12%. Our FY15 forecast growth at 5% and FY16 at 4% are unchanged.

MAHB recently issued RM1 billion perpetual sukuk (yield at 5.75%, AA2 rating, 10-year non-callable) will remove the need for fundraising via bank borrowings, where interest expense would hit its income statement. It will be treated as an equity from an accounting perspective and its interest payments will not hit earnings (as deductions will be on statement on changes of equity).

We have adjusted our model accordingly, as we earlier assumed no perpetual sukuk would be raised. Adjustment on earnings for FY14 is 7% lower (due to lower aircraft traffic), FY15 up 24% and FY16 increase by 11% (largely due to reduced “accounting” interest expense from the perpetual sukuk and Doha job win).

Our discounted cash flow (DCF)-derived target price (weighted average cost of capital of 8.3%) only nudges up to RM8.05 (from RM8.04) as, theoretically, interest expense is unchanged on DCF computation. We maintain our “buy” call. — RHB Research, Dec 15

This article first appeared in The Edge Financial Daily, on December 16, 2014.