Highlights

MAHB  remained  confident  on  the  potential  future  earnings growth  from  ISGA.  It  reiterated  that  the  IRR  of  the  latest acquisition  (EU€285m  for  the  remaining  40% )  is  above  its 15%  threshold.  MAHB  expects  ISGA  to  record  loss  of EU€20m  in 2014 before  turnaround  in 2015.

Addressing  the  concerns  on  Turkey  new  third  airport,  it believes  that ISGA growth  will remain  intact given:

1.  Turkish  Airlines  (TKA)  new  dual  hub  strategy,  at  both Atarturk  (to  be  replaced  by  the  new  airport)  and  ISGA. TKA planned to increase its  capacity in ISGA by 3x within the next three years ;

2.  Strong  connecting  transportation  network  from  ISGA  to Istanbul  city  centre.  Marmalay  link  is  expected  to complete by 2016; and

3.  Gaining  economic  importance  at  Asian  side  of  the greater  Istanbul  metropolitan  city.  Some  corporates  and banks are moving  their operations  into Asian side.

MAHB  is  confident  that  it  will  be  able  to  work  well  with Turkey  authority  even  without  Limak  Group  and  TAV . Turkey  has  an  open  policy  towards  foreign  investment. Futhermore,  Khazanah  (major  shareholder  of  MAHB)  also has several  investments  in the country.

It  also  indicated  the  potential  of  PSC revision, when the new airport  commences  operation  in  2018.  Currently,  both Ataturk  and  ISGA  are  charging  EU€15/int’l  departure (including  EU€1.50  share  for  the  government)  vs.  upcoming tariff  of EU€20  at the new airport.

As  for  the  funding  of  the acquisition, MAHB is not ruling out debt  raising  exercise  by  seeking  the  approval  from bondholders  to  raise  the  restrictive  debt  covenant.  However, we  do  not  expect  MAHB  to  upset  the  existing  bondholders (due  to  potential  downgrading  of  bond  rating)  and  antici pate MAHB to raise funds through  equity exercises.

Risks

World  crisis  (ie.  war,  tourism  and  epidemic  outbreak); Development  of  high  speed  train  between  Singapore  and Malaysia; Major movement  of airlines from KLIA to KLIA2.

Forecasts

Unchanged.

Rating BUY

Positives  – Monopoly  of airports  operation  in Malaysia (except Senai)   Main  beneficiary  of  strong  air  traffic  into  Malaysia  and Year  of  Festive  2015,  in  line with government initiatives to boost tourism sectors.   Potentially higher  non-aeronautical  revenue.

Negatives  – Low liquidity.

Valuation

Despite  the  short-term  weaknesses   in  earnings  and  EPS , we  remain  positive  on MAHB’s long term growth. Maintained BUY with unchanged  TP of RM8.90 (based  on SOP).

Source: Hong Leong Investment Bank Research - 27 Oct 2014