Highlights/ Comments

• We attended a technical briefing by MAHB which provided an overall picture of KLIA2 operation and safety.

• The main highlight from the briefing was on the land settlement issues of the parking bays. Recall that recently, one of Ai rAsia aircraft had a roll back incident at KLIA2. This has raised concerns about safety issues but management reassured its utmost priority in ensuring the safety of stakeholders (air travelers and workers) in KLIA2.

• Based on management (guided by geotechnical experts), the parking bay settlement per month is around 2mm – 5mm. Since commencement in May 2014, the average settlement was 60mm. The estimated settlement will be on an average of 300mm (another 240mm to go) over a span of 5 to 8 years period, in which resurfacing work will be done periodically to ensure operational safeness of KLIA2.

• In terms of cost, MAHB had spent RM14m in 2014 for the resurfacing work on the settlement and has allocated RM65m in 2015 for the same purpose. Going forward, we expect budget allocation for resurfacing these settlements will gradually decrease as the settlement intensity reduces overtime. We note that costs spent on the resurfacing is recognized as Capex and amortized across the concession period, i.e. lower impact on MAHB earnings.

• On AirAsia LoD to MAHB, we expect both parties to be able to reach an amicable settlement. Should there be no mutual solution, we do not expect any near term financial impact to MAHB earnings given that legal proceeding will usually prolonged up to 5 years.

• Despite AirAsia’s all egation, we opi ne that operati ons in KLIA2 are still safe as MAHB’s safety committee is continuously monitoring the settlement issues.

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. We believe the recent shares sell down is overdone.

Source: Hong Leong Investment Bank Research - 12 Aug 2015