- We maintain our HOLD recommendation on Malaysia Airports Holdings (MAHB) with a higher fair value of RM8.50/share, based on a 20% discount to our SOPvaluation.

- The Certificate of Completion and Compliance (CCC) for klia2 has finally been handed over on Friday by the main contractors, the UEM-Bina Puri JV, after much delay. klia2 is therefore well on track now to opening on time for its 2 May dateline. Its main tenant, AirAsia, had also recently announced that it will be moving into the new terminal by 9 May.

- We subsequently revise our FY14-FY16 earnings upwards by 2%-5% to account for the opening of the klia2 in May.

- Although the confirmed opening date of klia2 will lift the overhang on the stock, we remain cautious on the shorter term, as any incremental start-up costs associated with the commencement of klia2 has yet to be factored in.

- Furthermore, we believe that the negative sentiment amid the recent MH370 incident and abduction of a Chinese tourist in Sabah would hamper passenger growth, especially for Chinese tourists. The Star recently highlighted that 30% of Chinese tourists have cancelled their bookings to Malaysia following the MH370 incident, according to data from the Malaysia Inbound Tourism Association.

- In fact, in its latest passenger traffic report, MAHB highlighted that there was a decline in growth rates towards the last 10 days of March. We expect the weakness to persist going forward in the near term. We have revised our passenger growth assumption downwards to 9.2% YoY, against management’s guidance of 9.7%.

- Nevertheless, we believe that the longer-term outlook of the stock remains intact, buoyed by expected healthy passenger growth as the current congestion issue in LCCT is now addressed with the opening of klia2. This will also significantly boost retail and rental income, as commercial space in klia2 is 5x larger than that of LCCT’s.

- Valuation remains high at FY14 PE of 26x, against historical average of 18x, as depreciation and interest expense due to the construction of klia2 significantly weighs on bottom line.

- However, we believe that this will be addressed upon the extension of the concession period by at least 25 years, which is expected to kick-in end of the year. Our sensitivity analysis shows that a 25 years extension will raise our FY15 earnings by 42%, implying an FY15 PE of 19x.

Source: AmeSecurities