Highlights/ Comments

MAHB’s  share  price  remained  lackluster  for  the  past months from the reported weak statistics and earnings, as well  as  negative  sentiments,  no  thanks  to  MH370  and MH17  incidents,  and  uncertainties  from  MAS  restructuring. The  weak ened regional currency (especially I DR),  Thailand political  crisis  and  Ebola  outbreak  in  Africa  has  further affected  the overall  demand  for  travel.

The  reported  MAHB’s  July-Aug  pax  dropped  by  2.9%  yoy, mainly  dragged  by  KLIA-MTB  (-11.1%  yoy),  on  weakened MAS’s  traffic  and  re -allocation  of  Lion  Air and  Malindo Air into KLIA2 (since May). We expect continued weak Sep statistics,  which  may  not  bode  well  for  MAHB’s  upcoming 3Q14  earnings (likely to breakeven  or small losses ).

The indicative capacity deployment by airlines for the last  4 months  is  +2.8%  yoy  for  international  and  +0. 2%  for domestic.  Consequently we  have  revised  our  assumption on pax growth in the near term  FY14-16 to +4.0%, +9.0 % and +7.5%  (previously  +8.8%,  +8.0%  and +7.5%).  

However,  we  wish  to  reiterate  that  our  positive  long  term view  remains   intact,  as  historical  empirical  evidence  has shown air travel demands tend to  rebound strongly after any  crisis .  South  Ea st  Asia  region  is  poised  for  strong air travelling growth, as the  regional economy opens   up and  integrate s ,  combined  with  increasing  income  per capita.  Strategically  located  in  the  center  of  the  region, Malaysia (MAHB) will be the major  beneficiary  of the trend.

TAV offered EU€285m for Limak’s 40% stake in ISGA (60% -owned  by  MHB).   MAHB  has  ROFR  on  this  stake  and  has up to  mid-Oct to make  the  final decision.    The offer price is  higher  than  EU€225m  that  MAHB  paid  to  GMR  for additional  40% stake and our fair value  of EU€255m.

We  do  not  expect  MAHB  to  exercise  its  ROFR.  MAHB may work well with TAV, given TAV’s stronger relationship with  regional  airlines  and  Turk ish  government  and  TAV’s networks of domestic and  regional  airports.

Risks 

World crisis (i.e. war, terrorism, political unrest  and epidemic outbreak);  Development  of  high  speed  train  between Singapore  and Kuala Lumpur.

Forecasts 

After adjusting the pax  assumptions and effective tax (KLIA2 enjoy  tax  allowance),  we  cut  FY14  earnings  by  11.0%  and increased  FY15-16 earnings  by 6.0% and 5.5%.

Rating - BUY

• Positives  –  1)  Monopoly  of  airports  operation  in  Malaysia (except  Senai);  2)  Main  beneficiary  of  strong  air  traffic,  in line  with  government  initiatives  to  boost  tourism  sector ;  3) Unaffected  by  high  jet  fuel  cost  and  RM  depreciation;  4) Potentially  higher  non -aeronautical  revenue;  and  5) Concession extension.
• Negatives  –  1)  Low liquidity  & 2) Airline crisis (cut capacity).

Valuation 

We  remain  upbeat  on  MAHB’s  long  term  prospects  from increasing  demand  for  air  travel.  Maintained  BUY recommendation with  lower  target price of RM8.90 based on SOP (including  60% stake in ISGA).

Source: Hong Leong Investment Bank Research - 24 Sep 2014