Highlights/ Comments

• In July, Malaysia traffic recorded a positive growth of 12.7% YoY, owing to exceptional performance from KLIA2 and MASB airport at 17.6% YoY and 16.6% YoY respectively (partly due to low base in 2014 from Ramadhan).

• Istanbul ISGA pax movement recorded a double digit growth at 28.3% YoY (also due to Ramadhan); bringing YTD to 18.6% (HLIB’s estimate is 16.82%). We opine that ISGA growth may outperform our expectation on the back of robust capacity expansion of both Turkish Airline and Pegasus Airline.

• China and Middle East traffic recorded a strong double digit growth at 16.8% and 14% YoY, respectively. Neighboring region also recorded healthy growth as well as Europe on low base effect.

• We understand that MAS has cuts around 20% of its capacity in 2H15 which might cause a dent to pax movement. However, we are confident other airlines can cushion this impact and cater to the route cuts by MAS (albeit at lower capacity). Arrival of British Airways and ANA Airways can further cushioned MAS rationalization.

• We remained upbeat about MAHB pax movement performance with stronger 2H15 and maintain our pax movement forecast at 2.53% YoY.

Risks

• World crisis (ie. war, tourism and epidemic outbreak); Cost overrun and operation disruption in KLIA2; 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, in line with government initiatives to boost tourism sectors.

Negatives

• Low liquidity; and
• Short-term impact on traffic following air incidents.

Valuation

• Maintain BUY recommendation with unchanged target price of RM7.40 based on SOP

Source: Hong Leong Investment Bank Research - 11 Aug 2015