Highlights/ Comments

A subsidiary of Turkish Airlines (largest airline in Turkey with >200 fleets), Turkish Technic (TTech) has opened a new MRO (Aircraft Maintenance, Repair and Overhaul) facility named HABOM, with an investment of US$550m (RM1.7bn) at Istanbul Sabiha Gokcen Airport (SAW).

Complementing the existing facility at Istanbul Atartuk Airport (IST), HABOM will increase TTech capacity for: 1) narrow body aircraft by 57%; 2) wide body aircraft by 43%; and 3) closed area capacity by 193%.

HABOM Capabilities:

1) 7,000 personnel;

2) 364,000 m² total hangar area;

3) Two hangars can handle 11 narrow and 3 wide body aircrafts simultaneously; and

4) Facilities for the maintenance of landing gear, avionics, cabin and other aircraft components.

The commencement of TTech MRO services at SAW signifies the growing importance of MAHB’s 60%-owned (40% newly acquired) SAW in Turkey. We expect Turkish Airlines to increase the air connectivity in SAW, given the better supports and facilities in SAW. Turkish is implementing dual hub strategy at IST and SAW. SAW is experiencing significant growth in passenger movement (CGAR of 29.5% for 2009-2013 and 37.2% yoy in 1Q14).

SAW is enjoying the harvest from incremental passenger tariff revenue as well as non-aeronautical income (commercial, rental and commercial) in line with the strong passenger growth. Note that SAW does not collect aircraft landing and parking charges.

On the local front, we gather that June traffic has shown growth improvement vs. May’s 2.1% yoy, as we believe is due to easing tension among China’s air travellers.

We are not overly concern on the potential capacity cut of the ailing MAS, given that other airlines (especially AirAsia Group) will likely takeover the capacity reduction of MAS.

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 SAW).

Source:Hong Leong Investment Bank Research - 7 Jul 2014