Investment Highlights

• We upgrade Malaysia Airports Holdings (MAHB) from HOLD to BUY with a slightly higher fair value (FV) of RM8.04/share (from RM7.81/share previously) as the share price has retracted by more than 9% since reaching its post-pandemic peak of RM7.44 back in May 2023. Our valuation is pegged to an unchanged FY24F PE of 19x which is 1 standard deviation below its 2-year FY18–FY19 pre-pandemic average of 22x.

• Our FV also incorporates a 3% premium to account for an unchanged 4-star ESG rating (Exhibit 6), underpinned by the group’s initiatives to increase the usage of renewable energy.

• We slightly raised FY23F-25F earnings by 3%-4% to account for stronger contributions from Turkiye operations amid higher passenger traffic. Our forecasts are also premised on anticipations of subsequent earnings improvement on the back of a recovery in passenger traffic over the upcoming quarters.

• Last Thursday, Turkiye’s central bank raised the benchmark interest rate further by a whopping 6.5% from 8.5% previously to 15% as the country struggles to tame elevated inflation rates. Nevertheless, the Turkish lira sharply depreciated further, currently down by 27% year-to-date, due to dampened economic outlook for the country.

• Despite the challenging operating environment in Turkiye amid higher interest rates and weaker currency, we opine that the impact on MAHB’s Istanbul Sabiha Gokcen International Airport (ISGA) will be relatively contained due to resilient foreign passenger traffic. Our optimistic view is based on the assumption that a weaker Turkish lira would make the costs of traveling to Turkiye cheaper, thus spurring higher foreign passenger throughput at ISGA.

• The airport, which has a total capacity of 41mil passengers per annum, welcomed 31.1mil passengers in FY22, of which 50% was contributed by foreigners. We also take comfort in knowing that the group’s debts related to Turkiye operations are mainly denominated in Euro terms, thus alleviating concerns of any negative impact on the balance sheet.

• Our sensitivity analysis on ISGA suggests that a 10% increase in foreign passenger throughput at the airport would raise FY23F-24F earnings by 3%-5%.

• We also highlight that ISGA’s traffic looks set to beat prepandemic levels given that 4MFY23 data was already reaching 99% of 4MFY19 throughput volume of 11mil passengers due to higher number of domestic and foreign passenger. This is further underpinned by seasonally stronger passenger movements in 2HFY23 as observed by past data.

• In anticipation of the exceptional growth of ISGA, the group has earlier commenced the construction of a second runway at the airport. The expansion is expected to ease current capacity issues at ISGA as the single runway restricts operational hours with the need for mandatory regular maintenance of the runway.

• The construction of the runway is progressing smoothly and expected to be completed in 2HFY23. This would accomodate a higher number of flights to the airport, and therefore increased number of passengers, further propelling the group’s earnings growth in the near term.

• Meanwhile, the group’s operations in Malaysia are registering substantively stronger bottomlines backed by steady recovery of passenger traffic. In 4MFY23, airports in Malaysia recorded a total of 25.1 million passengers, representing 73% of 4MFY19 levels.

• MAHB’s earnings outlook remains promising and is on track to return to the black in FY23F premised on the recovery in air travel and tourism sectors as the pandemic appears to be largely over with international borders reopened globally. Even so, the stock currently trades at a compelling FY24F PE of 17x, which is 37% lower than the peak of 27x in the 2-year (FY18–FY19) pre-pandemic period.   

Source: AmInvest Research - 27 Jun 2023