Highlights/ Comments

• In August, Malaysia traffic recorded a growth of 3.5% YoY, owing to KLIA2 robust growth at 15.3% YoY, while KLIA and other airports registered -6.2% YoY and 2% YoY respectively. YTD growth is 2% (vs. HLIB’s forecast of 2.53%).

• Istanbul ISGA pax movement recorded another strong double digit growth of 21.4% YoY despite the political condition (re-election in Turkey), bringing YTD growth to 19.1% (vs. HLIB’s forecast of 18.62%).

• We are positive on the latest statistics as Malaysia pax movement recorded positive growth, implying improvement in air travel demand despite the current global economic condition and RM depreciation.
• 

• Nevertheless, Management guided some slow down at the end of August (pointing to China traffic and currency volatility as the culprit). We expect pax movement to remain resilient for the remainder of the year as we are entering into the peak season (due to school holidays and festivities).

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;

Forecasts

• Increase our ISGA pax movement growth to 19.45% for FY15, and increase our EURMYR to 4.20 assumption for FY15, and 4.50 for FY16/17 which change our earnings by 0.9%/-12.8%/-8.9% for FY15/16/17 respectively.

Rating

BUY

Positives

• Monopoly of airports operation in Malaysia (except Senai ); and Main beneficiary of strong air traffic into Malaysia, in line with government initiatives to boost tourism sector.

Negatives

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

Valuation

• Maintain BUY recommendation with lower target price of RM6.79 (from RM7.40) as we adjust discount rate to 11% (from 10%) based on SOP to better reflect market condition on aviation stocks. We opine market has fully priced in MAHB poor result and Ai rAsia allegation and see attractive valuation emerged.

Source: Hong Leong Investment Bank Research - 11 Sep 2015