- We initiate our coverage on Malaysia Airports Holdings (MAHB) with a BUY recommendation and a fair value of RM10.10/share - a 10% discount to our SOP value of RM11.23/share.

- Our investment thesis is premised on the following:- i) The opening of klia2 by May 2 2014, which would contribute to the group’s EBITDA growth of 11%-16%. Overall commercial space would more than double, leading to substantially higher rental and retail revenue of ~25%-30%.

ii) A significant increase in the passenger service charge (PSC) in FY14 due to:- (a) decent passenger growth of 12%, as a result of new airlines received, intense competition between local airlines and the potential incremental passenger volume contribution from Visit Malaysia Year; and (b) a PSC rate hike that is due for review every five years.

iii) The negotiation on the extension of the concession period by another 35 years to 2069, which would decrease the depreciation/amortisation of the capex incurred for klia2. The negotiation is expected to be completed by the first half of 2014, which will boost FY14-16F earnings by 23%-34%. Extending our DCF valuation by further 35 years results in a rise of our TP to RM15.50/share.

iv) The potential monetisation of its 6750 acres of land bank approved for commercial development into an airport city, dubbed the KLIA Aeropolis. Latest development is the upscale factory outlet park to be completed by end-FY14, with a GDV of RM335mil and a completed retail floor space of 505,720 sq ft.

- We expect FCF to turn positive in FY14 as the capex cycle would have peaked in FY13. MAHB has a dividend payout policy of 50% of its net earnings, translating to yields of 2%-3%.

- The stock currently trades at an FY14 PE of 22x, with a historical mean level of 16x. We believe our TP of RM10.50/share - which implies a PE of 25x - is justified, given that MAHB is virtually the only airport operator in Malaysia and the opening of klia2 will bring MAHB to the next phase of accelerated growth.

Source: AmeSecurities