Highlights/ Comments

MAHB’s 23% JV GMR Male International Airport (GMIAL) had won its case against Government of Maldives (GoM) and Maldives Airport Company (MACL), in an arbitrage proceeding in Singapore.

The panel arbitrators has declared that: 1) contract agreement between GMIAL and GoM and MACL was legally binding; 2) contract agreement between the 3 parties was wrongful terminated; 3) GoM and MACL are jointly liable in damages to GMIAL for loss caused by wrongful contract termination; and 4) GoM and MACL to pay GMIAL US$4m for the cost incurred for the proceeding.

MAHB is currently studying and assessing the amount of damages claimable by GMIAL against GoM and MACL. Recall that MAHB had impaired its initial investments of RM21.5m and retained earnings of RM47.4m (total RM68.9m) back in 4Q12.

We believe that MAHB is likely to claim more than the impaired amounts, given GMIAL has lost its potential source of profits from the concession contract (undertaking the rehabilitation, expansion, modernization, operation and maintenance of the Maldives Airport concession). Hence, MAHB may recognize one-off earnings in 2H14.

Nevertheless, GoM and MACL may continue to file appeal on the arbitrage court’s decision, which will lengthen the proceeding.

We continue to favour MAHB in view of the aggressive promotional campaigns launched by airlines to induce air-travel demands (especially on international destinations), and the smooth commencement of KLIA2 (since early May) had increases the potential of non-aeronautical revenue (from higher traffic flow, higher consumer spending on retail, higher commercial leases and rentals, advertising, and carparks).

We deemed the impact from MH370 and Sabah kidnapping incidents to be relatively short term and demand for air travels are likely to recover within 3 months.

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- 24 Jun 2014