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This article first appeared in The Edge Financial Daily on March 21, 2019

Malaysia Airports Holdings Bhd
(March 20, RM7.70)
Maintain buy with an unchanged target price (TP) of RM9.44:
The federal government announced that it had approved RM1.6 billion to build the Kulim International Airport (KIA) in Kedah. This is one of five high-impact projects aimed at bridging the development gap between regions in the Mid-Term Review of the 11th Malaysia Plan. Prior to this, Kedah received the government’s approval to establish a company called KXP AirportCity Holdings to coordinate and manage the development of Kulim Airport.

 

No solid details have been laid out so far whether KIA will be used for either air cargo or commercial flights, or both. However, we do not discount the possibility that KIA will emphasise air freight to further facilitate the movement of goods from companies located in Kulim Hi-Tech Park. In addition, the airport will complement the development of a logistics and manufacturing hub in Sidam.

While such plans would bring up concerns of businesses shifting to Kulim due to lower cost of doing business, we believe that this will be limited with the presence of major global logistics player such as FedEx in the Penang International Airport (PIA). FedEx set up a RM17.6 million shipping facility spanning 4,830 sq m called the FedEx Gateway at PIA which enables goods to be shipped to the US in one business day and overnight delivery to 20 major Asian cities. The FedEx services are made possible with two Boeing 767s and three 40ft trucks connecting Penang by road to Bangkok and Singapore. Internally, the facility features an X-ray scan for all packages regardless of size and has the capacity to sort 2,700 parcels per hour. As such, we believe the presence of such logistics players will retain PIA’s attractiveness as an air cargo hub for multi-national companies (MNCs).

PIA’s total passenger traffic has been growing at a five-year compounded annual growth rate (CAGR) of 7.2%. The airport handled 7.78 million passengers in 2018, exceeding the design capacity of 6.5 million, with international passengers growing by 15.2% to 1.54 million this year. As such, expansion projects to expand capacity to 12 million passengers will start in 2020. Furthermore, we believe that MAHB will continue attracting more international airlines to fly to PIA as seen in Langkawi International Airport which welcomed the first flight of TUI Airways from Birmingham. Therefore, PIA’s passenger growth, especially for international passengers, would not be undermined even if KIA focuses on commercial flights.

Taking into account the above factors, we do not foresee any dilution in MAHB’s earnings from PIA in the wake of KIA’s development, assuming that KIA will be operated by another party other than MAHB, similar to MMC Corp Bhd’s Senai International Airport in Johor. Even if KIA were to be under MAHB’s stable of airports, this would serve as an opportunity for MAHB to strengthen its footprint in the northern region. Looking ahead, MAHB will maintain its upward trajectory, especially in terms of passenger growth, amid the relaxation of visa policies for Chinese and Indian nationals visiting Malaysia. 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. As such, we reiterate our optimism that MAHB passenger numbers can surpass the 100 million mark in 2019, while maintaining a relatively conservative growth rate of 3.5%. All things considered, we maintain our “buy” call on MAHB with a TP of RM9.44 per share as it is a proxy to Malaysia’s inbound/outbound travel industry, being Malaysia’s largest airport operator. — MIDF Research, March 20

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