- We maintain our HOLD call on Malaysia Airports Holdings (MAHB) with a lower fair value of RM7.20/share, based on our sum-of-parts valuation.

- Our lower fair value follows a cut in FY14-FY16F earnings by 23%-29%, as we lower our passenger growth assumptions by 2-4 ppts. This comes on the back of weakening passenger numbers and management’s recent cut in traffic growth guidance to 4.3% for FY14F.

- MAHB announced yesterday that it has exercised the right of first refusal (ROFR) to acquire the remaining 40% stake that it does not own in Istanbul Sabiha Gokcen Airport (ISG) and LGM Havalimani – which manages the commercial operations – from Limak and Limak Yatirim.

- The purchase, expected to be completed by 1QFY15, is for a consideration of EUR285mil (RM1.18bil). This comes at a 27% premium compared to the initial EUR225mil consideration that MAHB had paid for a 40% stake from GMR earlier this year to bring its stake to 60% in ISG.

- We understand that MAHB is still deliberating on the most appropriate funding structure to satisfy the purchase consideration, which would be announced later once finalised.

- In the meantime, MAHB will secure bridging debt facilities and/or drawdown its existing facilities to fund the purchase in the event the funding structure could not be finalised in time.

- But note that in the event that the acquisition is funded fully via borrowings, this will bring gross gearing to 1.22x (chart 1) upon the completion of the exercise. This is very close to MAHB breaching its debt covenant of less than 1.25x.

- As such we believe an equity raising exercise may be likely. As we expect ISG to only break even in 2015, contributions to net earnings will be muted, but this implies EPS dilution for FY15.

- We have not factored in the effects of the acquisition of ISG and LGM into our model, pending an analyst briefing that will be held later today.

- In the near term, we remain cautious on the outlook of MAHB in light of potential further weakness in earnings due to the weakening passenger growth numbers, as well as start-up costs of klia2.

Source: AmeSecurities