Highlights/ Comments

While GoM has not announced changes in passenger tariff charges (PSC) accorded to MAHB under the signed Operating Agreement in Feb 2009, MAHB will recognize the entitled 10% increment under MARCS (marginal compensation) from 14 Feb 2014 onwards. MARCS is being offset against user fees payable to GoM.

Regarding the potential standardization of PSC in KLIA2 with KLIA, the decision stays with GoM, who are being pressured by IATA for unfair practices/competitions. However, GoM has assured AirAsia Group that KLIA2 tariffs remain unchanged at the moment. We have not yet to impute any potential upside from the standardization.

GoM has agreed in principal to extend MAHB concession by another 25 years end 2049, but no official letter from GoM yet, due to no official Ministry of Transport at the moment. Hence, MAHB will have to amortize its RM4bn cost on KLIA2 for the remaining 20 years concession (RM200m/year). MAHB expects the issue to be resolved by 2015, with potential restatement of account to reflect the longer 45 years concession period, and amortization of RM90m/year. Note that amortization expense is a non-cash item, and will not affect MAHB’s cashflow. MAHB will maintain its dividend payout quantum despite the temporary lower accounting profit.

Based on MAHB simulation, KLIA2 is expected to be profitable within first year of operation, even with the high concession expense of RM200m.

MAHB is expecting to receive KLIA2 CCC (Certificate of Completion and Compliance) and ORAT (Operational Readiness and Airport Transfer) before 2 May 2014. ICAO (International Civil Aviation Organization) also indicated the functionality and safety of KLIA2. AirAsia Group has also announced migration into KLIA2 by 9 May 2014.

MAHB is currently studying plans to expand the capacity of KLIA-MTB from 25m passenger/year to 35/40m passenger/year, by building another satellite terminal, after KLIA-MTB hits 28m passenger movement in 2013.

Risks

World crisis (ie. war, tourism and epidemic outbreak); Delay in the completion of KLIA2; Development of high speed train between Singapore and Pulau Pinang; Major movement of airlines from KLIA to KLIA2.

Forecasts

Unchanged, pending 1Q14 results by 24 April 2014.

Rating

BUY

Positives – 1) Monopoly of airports operation in Malaysia (except Senai); 2) Main beneficiary of strong air traffic into Malaysia and VMY 2014, in line with government initiatives to boost tourism sector; 3) Unaffected by high jet fuel cost and RM depreciation; and 4) Potentially higher nonaeronautical revenue.

Negatives – 1) Low liquidity.

Valuation

Maintained BUY recommendation with unchanged target price of RM10.55 based on SOP (including 60% stake in ISGA).

Source: Hong Leong Investment Bank Research - 17 Apr 2014