- We maintain our HOLD recommendation on Malaysia Airports Holdings (MAHB) with a lower fair value of RM7.18/share (vs. RM7.20/share previously), based on our sum-of-parts valuation.

- We have cut our FY14F-FY16F earnings estimates by 34%-36%, as we further tweak our klia2 depreciation assumptions upward. Our fair value remains largely unaffected as the higher depreciation expense is a noncash item in our DCF valuation for the Malaysian operations.

- MAHB reported a third quarter earnings of RM1.6mil, bringing 9MFY14F profits to RM85.6mil (-75% YoY). This accounted for 56% of our previous full-year estimates (consensus: 55%).

- Sequentially, its 3QFY14 earnings of RM1.6mil recovered slightly from a loss of RM2.2mil (excluding RM42.5mil one-off loss for ISGA) in 2QFY14, which was mainly due to higher costs associated with klia2 which opened in May (i.e. depreciation, interest expenses and operating costs).

- Aeronautical revenue grew 12% YoY on the back of:- (i) 6.8% growth (year-to-September) in passenger movements; (ii) recognition of the c.10% PSC hike under the Marginal Cost Support Scheme; and (iii) 16% increase in its landing and parking revenue (due to increase in aircraft movements and a 10% hike in charges).

- However, the retail segment, which largely comprises its duty-free business, reported relatively flat revenue (+0.6% YoY). This resulted in EBITDA losses of RM15.6mil. We understand that this was due to the delay in opening of some of the stores in the midst of transitioning from LCCT. Reduced number of high-spending passengers from China and Europe also led to a contraction in overall sales per pax in both KLIA and klia2.

- MAHB reported smaller losses of RM2.8mil in 3Q (vs. RM8.3mil in losses in 2Q) from its jointly controlled entity, Istanbul Sabiha Gokcen Airport (ISGA). On the company level, ISGA recorded EBITDA of EUR98mil for 9MFY14 vs. EUR56mil for full-year FY13, due to strong passenger growth. The group remains confident that ISGA would break even in FY15.

- The discussion with the Ministry of Transport for the 30-year extension of the concession period is still ongoing, and is targeted to be completed by year end. The group guides that it will generate savings of RM70mil-RM80mil on its depreciation expense upon the extension.

Source: AmeSecurities