Highlights/ Comments

MAHB released a weak May statistics, showing passenger movement growth of only +2.1% yoy, due to: 1) impact from MH370 and Sabah kidnaping incidents; 2) capacity rationalization (especially on domestic routes); and 3) high base effect (strong traffic during election in May 2013).

KLIA experienced -11.0% on China Sector routes alone (~10% of the overall passenger movement) from MH370 incident and kidnapping of Chinese incidents in Sabah. We believe MAS as the main airline operator in KLIA-MTB (-3.2% yoy in May) was severely affected.

Since mid-May, local airlines – MAS, AirAsia Group (including AirAsia X) and Malindo have been aggressive in their marketing campaigns with attractive free seats and promotional all-in ticket prices for all destinations, in order to fill up the increasing flight capacity.

Hence, we expect recovery in June-July (impact normalization) and MAHB remained as the major beneficiary, from airport charges and non-aeronautical revenue (further boosted by KLIA2 commencement in May).

Risks

World crisis (i.e. war, terrorism, political unrest and epidemic outbreak); Development of high speed train between Singapore and Kuala Lumpur; Major movement of airlines from KLIA to KLIA2.

Forecasts

Unchanged.

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

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

Source: Hong Leong Investment Bank Research - 16 Jun 2014