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This article first appeared in The Edge Financial Daily on July 4, 2019

Malaysia Airports Holdings Bhd
(July 3, RM8.70)
Maintain buy with an unchanged target price (TP) of RM9:
The ministry of finance has approved Malaysia Airports Holdings Bhd’s (MAHB) plans to expand the Penang International Airport (PIA) in different phases (source: The Edge). MAHB will submit its construction plans to all relevant authorities by end-July. The project will cost RM1,045 million and expand the capacity to 12 million people per year from 6.5 million currently. Based on the Malaysian Aviation Commission’s (Mavcom) prescribed Regulatory Asset Base framework for a weighted average cost of capital of 10.88% before tax, this project is feasible and should be earnings-accretive. Our earnings forecasts, RM9 TP and “buy” call are unchanged pending a company visit.

MAHB has been working on this for the past two years. PIA has been operating above its design capacity for the past two years and is one of the faster growth airports in MAHB’s portfolio. Mavcom, in its consultation paper on June 18, stated the PIA urgently needs an expansion. Mavcom has reviewed MAHB’s tentative capital expenditure (capex) of RM1,045 million for PIA and given a tentative approval. We believe MAHB will use a combination of internal cash and debt to fund this capex.

If MAHB can complete this expansion project in a timely and efficient manner, it will materially weaken the business case for the new Kulim Airport development. Airlines are naturally more receptive to expand in existing airports rather than explore greenfield airports. At its existing capacity, PIA contributed 7.9% to MAHB’s system-wide passenger movements for its Malaysia operations in 2018.

We believe an improving regulatory outlook is a major sentiment booster for MAHB. MAHB is currently trading at a deep discount relative to its global peers based on price-earnings ratio, enterprise value-to-earnings before interest, taxes, depreciation and amortisation (EV/Ebitda) and price-to-book value. Our TP is based on 8.6 times financial year 2019 EV/Ebitda, one standard deviation below mean. — Maybank IB Research, July 3

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