- We maintain our HOLD rating on Malaysia Airports Holdings (MAHB) with a lower fair value of RM6.50/share (from RM6.70/share previously), based on our sum-ofparts valuation. We cut our FY15F-17F earnings by 20%- 62%, as we adjust our depreciation and interest expense assumptions.

- Stripping off a net gain of ~RM22mil for the disposal of its 10% stake in the Delhi International Airport and an RM25mil provision for doubtful debts, MAHB registered a core net loss of RM17mil, which brings the total loss to RM48mil for 1HFY15. This compares to the full-year consensus profit of RM132.5mil for FY15. The group also declared an interim dividend of 7 sen/share.

- The group’s 1HFY15 core net loss was mainly due to additional depreciation and interest charges with the commencement of klia2. Additionally, MAHB also incurs 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.

- However, we understand that the group is well on track to achieve its target EBITDA of RM1.5bil. Despite a flat passenger growth, the aeronautical revenue for its Malaysian operations increased by 4% YoY mainly due to the recognition of the ~10% passenger service charge (PSC) hike under the Marginal Cost Support Scheme and higher landing & parking revenue. Its rental revenue also increased by 20% due to a larger commercial area at klia2 compared with LCCT.

- This was partially offset by a 20% YoY increase in operating costs due to higher staff costs, maintenance and utilities expenses with the commencement of klia2.

- Stripping off the amortisation of the net fair value, operations in Turkey recorded its first profitable quarter in 2QFY15, largely due to strong passenger growth and interest savings from the refinancing of its loans.

- The management expects 2HFY15 to be stronger due to seasonality, and is confident of achieving its target passenger growth of 3% for its Malaysian airports. Nevertheless, we remain cautious on the outlook of MAHB in the near term due to earnings weakness amid 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 - 31 Jul 2015