Malaysia Airports Holdings Bhd
(Feb 16, RM7.01)
Maintain buy call with an ex-rights target price (TP) of RM7.35. MAHB posted a core net profit for financial year 2014 ended December (FY14) of RM112 million, above our earlier RM84 million forecast but below consensus estimates. 

There were many exceptional items (net total: RM635 million), of which a substantial amount was related to the fair value and bargain of purchase re-measurement with regard to the full acquisition of Sabiha Gokcen Airport (ISG) in Turkey. There was also a change in the depreciation methodology to unit of production (UOP) from straight line. 

As this was backdated from Jan 1, 2014, this resulted in a reduction in depreciation of RM101 million. Our calculation of core net profit does not take into account this adjustment. 

As a more appropriate apple-to-apple comparison, MAHB’s FY14 earnings before interest, taxes, depreciation, and amortisation  before user fee charges grew by 9.7% year-on-year (y-o-y), in tandem with the 11% increase in revenue.

MAHB’s briefing mostly centred on discussions about the change in depreciation and amortisation methodology. It guided for its Malaysian operations likely incurring a RM500 million depreciation in FY15, lower than our earlier RM540 million forecast. 

The methodology change will more reflect its asset utilisation, which we think is fair. MAHB’s non-klia2 assets are already using the UOP. 

ISG’s FY14 losses of €23.4 million (RM95.6 million) were lower than our €33.8 million forecast. This was on the 25.4% y-o-y rise in passenger traffic that led to improved operating efficiencies. 

Management has successfully restructured its borrowings, effectively reducing the effective interest rate to 2.75% (from 10%), which we estimate will result in €15 million in annual interest savings.

We trim ISG’s FY15 and FY16 losses (from €25.2 million and €5.8 million respectively earlier) to a €1.2 million loss (FY15) and a €16.4 million profit (FY16). 

We also trim depreciation at its Malaysian operations by RM40 million in FY15/FY16 following the change in methodology. 

Our FY15/FY16 numbers are now consolidated. At a 43.6% earnings growth in FY15, the rights issue itself is already earnings per share (EPS) accretive thanks to the sharp reduction in losses at ISG. 

Our FY15 core EPS is expected to increase by 17% y-o-y and our discounted cash flow-derived TP (ex-rights) is now adjusted to RM7.35 (from an ex-rights TP of RM7.53) on weaker euro/ringgit assumptions. — RHB Research, Feb 16

This article first appeared in The Edge Financial Daily, on February 17, 2015.