Results

Below expectations - Reported 2Q14 core net losses of RM22.1m (ex-construction), dragged down 1H14 core earnings to RM107.0m or only accounted for 24.9% of HLIB’s RM429.9m and 27.4% of consensus for FY14.

Deviations

Lower than expected passenger movements, higher than expected airlines rebates, higher than expected start-up cost related to KLIA2 (operation, depreciation and interest cost).

Dividends

None.

Highlights

2Q14 was generally affected by MH370 incident (as well as Sabah kidnaping incidents) and high startup cost of KLIA2 in May. KLIA-MTB main operator MAS was suffering from weakened consumer demand (especially on China traffic). Startup operation in KLIA2 proved to be costly on high operating (mainly utilities), depreciation and interest cost (which was previously capitalized during construction).

MAHB also missed out on commercial revenue (average 1-mth) as retailers enjoy rental-free period for renovation works, while its own Eraman was facing issues with contractors on the layouts and designs.

Apart from the guided RM4bn KLIA2 construction cost, MAHB also need to depreciate the capitalized RM500m interest cost and RM600-700m for land clearing and common/sharing facilities between KLIA and KLIA2. The depreciation is currently charged against remaining 20 years concession period, pending official concession extension for another 25-35 years from MOT (likely in 2015), which MAHB expects savings of RM70-80m depreciation p.a.

As guided, MAHB has to account for the previous unrecognized ISGA’s accumulated losses of RM42.5m in 2Q14. ISGA incurred €20m losses in 1H14, but MAHB expects the JV to turnaround in 2H14 on strong traffic growth (35.2% yoy in 1H14).

Risks

World crisis (ie. war, tourism and epidemic outbreak), delay in the completion of KLIA2 and the development of high speed train between Singapore and Pulau Pinang.

Forecasts

Cut earnings for FY14-16 by 53-62%, accounting for lower traffic growth as well as higher operational, depreciation and interest costs. However, we have not impute the potential concession extension, which will lower depreciation expenses by RM70-80m p.a.

Rating

BUY

Positives – 1) Monopoly of airports operation in Malaysia (except Senai); 2) Main beneficiary government initiatives to boost tourism; 3) Concession extension for another 35 years to 2069; 4) Unaffected by high jet fuel cost and RM depreciation; and 5) Potentially higher non-aeronautical revenue.

Negatives – 1) Low liquidity; and 2) High start-up cost on KLIA2.

Valuation

We remained positive on MAHB growth, and maintained BUY on MAHB with lower target price of RM9.38 (previously RM10.55) based on SOP.

Source:Hong Leong Investment Bank Research - 25 Jul 2014