- We maintain our HOLD rating on Malaysia Airports Holdings (MAHB) with an unchanged fair value of RM7.70/share, based on our sum-of-parts valuation.

- Khazanah Nasional Bhd has requested MAS to undertake a selective capital reduction and repayment exercise for MAS’ minority shareholders, which would make Khazanah the sole shareholder of the latter.

- Among the rationales for the exercise includes the execution of a restructuring plan for MAS, which would likely entail a capacity reduction on loss-making routes.

- According to MAHB’s 2013 annual report, MAS passengers make up ~55% of international passengers in KLIA MTB, and 90% of domestic passengers (overall 63% of KLIA MTB total passengers). Including LCCT, MAS passengers make up 34% of total passengers.

- Our sensitivity analysis shows that for every 1% reduction in MAS’ capacity, MAHB will recognise a decline of 0.2% in revenue.

- For the purpose of our analysis on the impact of possible capacity cuts on MAHB’s earnings, we assume a bear case scenario where MAS cuts its capacity in FY15 by 20% to the trough ASK level of 47,838mil KM in 2009 (FY13 ASK of 58,381mil KM).

- Based on this scenario and the assumption of a similar 20% reduction in MAS’ passenger numbers, we estimate MAHB’s FY15F-FY16F revenue to decline by 4%. However, this leads to circa 20%-22% decline in the bottomline due to the fixed nature of the bulk of MAHB’s costs.

- We have also incorporated a lower landing and parking fees revenue in our estimation above in tandem with the decrease in capacity. Handling and landing costs make up circa 12% of MAS total costs.

- This would subsequently bring our fair value down to RM7.10/share.

- However, we leave our numbers unchanged for now, pending MAS’s quarterly result and Khazanah’s restructuring plan MAS that is expected to be revealed by end of the month. We currently assume an overall total passenger growth of 9.2% for 2014.

- We believe the share price will remain capped in the near term, as the restructuring plan, coupled with higher than expected start up costs for the recently opened klia2, will pose further uncertainties.

Source: AmeSecurities