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

Malaysia Airports Holdings Bhd
(Sept 3, RM8.45)
Maintain buy with an unchanged target price (TP) of RM9.20: Keep “buy” with an unchanged sum-of-parts-derived TP of RM9.20, 12% upside plus about 2% forecast financial year 2020 (FY20F) yield. Our TP implies a 25.9 times FY20F price-earnings (PE), or -0.45 standard deviation (SD) from its average two-year forward PE.

First half of financial year 2019 (1HFY19) earnings met expectations with a 7% year-on-year (y-o-y) core earnings before interest, taxes, depreciation and amortisation (Ebitda) improvement.

The news of a lower passenger service charge (PSC) collection for non-Kuala Lumpur Internaitonal Airport (KLIA) international flights is “neutral” to Malaysia Airports Holdings Bhd’s (MAHB) earnings as it would be implemented via the contra user fee method. Keep “buy” due to its attractive valuation with sustainable earnings visibility.

MAHB’s 1HFY19 core net profit of RM309.7 million made up 58% and 57% of our and consensus earnings estimates. We estimate 2H passenger volume growth will slow down given the prolonged trade war, which may also affect the air travel demand as economies slow down. As expected, a five sen dividend was announced (same as last year).

1HFY19 core Ebitda increased by 7% y-o-y to RM1.16 billion. The better core Ebitda achieved was due to an improvement in revenue by 9% y-o-y to RM2.51 billion as passenger volume increased 4.4% y-o-y to 67.9 million.

Last Friday, the transport ministry announced that effective Oct 1, 2019, the PSC for international travellers (those flying beyond Asean, from non-KLIA airports) would be lowered by RM23 to RM50. As the implementation will be done via the contra method of user fee, the earnings impact is “neutral” to MAHB as the lower PSC collection will be neutralised by a lower user fee to be paid to the government. In FY18, MAHB paid a user fee of RM417.6 million to the government, and hence this expense is expected to be lowered by the same amount of the lower PSC collected.

Maintain “buy” with unchanged earnings forecasts and RM9.20 TP. The Malaysian Aviation Commission should announce the new PSC this month (for implementation on Jan 1, 2020), and this would set the clarity on MAHB’s sustainable earnings going forward.

We believe the stock is still attractive at the current level of FY20F PE of 23.2 times or -0.85SD valuation with sustainable earnings improvement visibility

Risks to our call: Downside risks are weaker-than-expected passenger traffic, unfriendly regulatory asset base Regulatory Asset Base framework outcome, negative outcome from ongoing court cases, and a sharp depreciation of the Turkish lira. — RHB Research Institute, Sept 3