- We maintain our HOLD call on Malaysia Airports Holdings Bhd (MAHB) with an unchanged fair value of RM7.18/share, based on our sum-of-parts valuation.

- MAHB announced a proposal to undertake a 1-for-5 renounceable rights issue to raise proceeds to undertake the acquisition of the remaining 40% stake in Istanbul Sabiha Gokcen Airport (ISGA), which is expected to be completed in 1QFY15.

- The rights price has not been fixed yet, but for illustrative purposes, the indicative issue price for the rights would be at RM4.80/share – 29% discount to the theoretical ex-rights price of ~RM6.78/share, based on the five days VWAP of MAHB shares.

- This exercise is expected to raise gross proceeds of up to RM1,319mil, where 89% of the proceeds will be used to fund the acquisition, while the remainder will be used for general working capital purposes and fees for the rights issue.

- The proposed rights issue is not a major surprise, as funding the acquisition through debt would bring gross gearing to 1.22x, while would breach its gearing threshold of 1x needed to retain its AAA credit rating, and very close to its debt covenant of not more than 1.25x. With this exercise, gross gearing would drop to a comfortable level of 0.82x.

- Via this exercise, we estimate a 17% dilution to our FY15F EPS. Also our ex-rights SOP will drop to RM6.54/share, based on the indicative price.

- As we expect ISG to only break even in 2015, contributions from the acquisition of ISGA to net earnings will be muted in the near term.

- In the near term, we remain cautious on the outlook of MAHB in light of potential weakness in earnings due to the weakening passenger growth numbers, as well as start-up costs of klia2. Furthermore, the restructuring exercise of MAS would see the airline cutting capacity on its unprofitable routes, posing further downside risks to MAHB’s passenger numbers.

- 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