- We maintain our HOLD rating on Malaysia Airports Holdings (MAHB) with a lower ex-rights fair value of RM6.70/share (from RM6.85/share previously), based on our sum-of-parts valuation.

- We slash our FY15F-17F earnings by 49%-61%, as we increase our depreciation and amortisation assumptions. However, we note that this is a non-cash item and hence, does not have a significant impact on the DCF of its core operations.

- Stripping off a forex translation gain of RM63.4mil from the EUR279mil bridging loan that was settled on 2 April 2015, MAHB registered a core net loss of RM30.8mil. The fullyear consensus estimate is for a RM223.8mil profit for FY15.

- MAHB’s 1QFY15 core net loss stemmed mainly from additional amortisation charges of RM45.2mil per quarter resulting from the fair valuation exercise on the concession rights of Istanbul Sabiha Gokcen Airport (ISG) and its commercial arm LGM post acquisition, which was unexpected.

- MAHB’s Malaysian operations’ earnings declined by 22% YoY, mainly due to higher costs associated with klia2 which opened in May 2014 which saw operating costs increasing by 24%, depreciation by 81% and interest expenses by more than five-folds.

- This was further dragged by weak earnings from ISG and LGM. Excluding the RM45.2mil amortisation of the concession rights, the Istanbul operations registered losses before tax of RM25.5mil, mainly due to high depreciation and interest expense caused by a step-up (every five years) in concession utilisation fees to the government this year.

- Although we are impressed by the passenger growth in ISG thus far (2018-2014 CAGR of 36%), contributions from the airport to bottom line will nevertheless be minimal in the near term, as it is still in its gestation period.

- In the near term, we remain cautious on the outlook of MAHB in light of earnings weakness amid weakening passenger growth numbers, as well as escalating costs from 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.

Source: AmeSecurities Research - 6 May 2015