-  We maintain our HOLD rating on Malaysia Airports Holdings (MAHB) with a lower fair value of RM7.70/share (vs. RM8.50/share previously), based on our SOP valuation.

-  This follows a FY14 earnings cut by 50% and FY15-FY16 earnings cut by ~30% to account for higher operating, depreciation, and interest costs incurred by klia2.

-  MAHB reported a disappointing 2QFY14 core net loss of RM68mil (stripping off klia2 construction profit of RM23mil), bringing 1HFY14 core net earnings to RM55.5mil (-71% YoY). This is significantly below our previous full-year estimate of RM404mil (consensus: RM390mil).

-  The key reason for the weak earnings in 2QFY14 is the higher costs associated with klia2 which opened in May. MAHB’s depreciation/amortisation expense increased by 108% YoY in 2Q, which was higher than expected as some of klia2’s assets have to be depreciated over a shorter useful life, contrary to previous guidance.

-  MAHB also incurred higher 2Q operating costs due to the larger klia2 terminal. Utilities costs increased by 49% YoY, while employee benefits increased by 15.6%. Additionally, interest expense increased by 390% during the quarter.

-  MAHB reported a loss of RM54.5mil in 1HFY14 from its jointly controlled entity, Istanbul Sabiha Gokcen Airport (ISGA), which includes a one-off recognition of previously unrecognised losses of RM42.5mil. The group remains confident that ISGA would break even in FY15.

-  Top line (ex construction revenue) for 1HFY14 grew by 11%, mainly on the back of higher aeronautical revenue. This is due to higher passenger movements (12% year-to-June) and recognition of the c.10% PSC hike under the Marginal Cost Support Scheme.

-  MAHB’s share price has since declined by 6.2% yesterday, following the release of the result in the afternoon, which we believe has somewhat priced in the weak set of numbers for the first half. Management expects profits in the subsequent quarters to improve, as retail and rental revenue picks up once the main Eraman outlet in klia2 is completed (estimated at end of July), and more tenants move in after the renovation works are done.

-  The discussion with the Ministry of Transport for the 30-year extension of the concession period is still ongoing. MAHB maintains its target for the extension to kick in early next year. The group guides that it will generate savings of ~RM70mil-80mil on its depreciation expense upon the extension.

-  In the event where the extension does not happen within the targeted timeframe, MAHB will still proceed to pay a dividend that is equivalent to a payout as though the extension has taken place.

Source: AmeSecurities