Highlights/ Comments

• MAHB recorded passenger movement growth of +3.0% yoy in 1Q16, despite 20-30% capacity cut by MAS since 2H15, pointing to a recovery in air travel demand (travelling with other local and international airlines). The drop of 0.7% yoy in March was mainly due to timing of Formula 1 event, which took place in March 2015 vs. October 2016.

• We expect passenger growth of +6.0% yoy for FY16 as we expect stronger growth towards 2H16, from normalization of impact from MAS capacity rationalization (since 2H15) as well as continued recovery of air travel demand.

• MAS capacity rationalization is being replaced by MAS code-sharing with Emirates, additional capacities by local airlines and foreign airlines as well as new airlines entries (i.e. BA, ANA, China Airlines and Vietjet).

• Concerns on KLIA-MTB being cannibalized by KLIA2 is likely to ease off, with MAS gradually regaining its position, increasing capacity of foreign full service carriers and transfer of Malindo Air operation into KLIA-MTB from KLIA2.

• Under its second 5-year strategic plan Runway to Success 2020, MAHB continues to focus on the growth of nonaeronautical earnings with the development of KLIA Aeropolis – landside commercial development of 6,600 acres. For the past few years, there were several developments in areas surrounding KLIA (i.e. Putrajaya, Nilai etc), which will enhance the value of KLIA Aeropolis.

• ISGA continued to record strong passenger growth of +19.7% yoy in 1Q16 after +20.3% yoy in FY15. ISGA is expected to hit its current terminal capacity of 33m pax pa within another 1-2 years due to the strong growth. Management is spending €20m capex for capacity expansion to 41m by 2018. Given the strong growth, we believe ISGA needs to develop another terminal building by 2020-2021, which may extend its concession further from current period ending 2030.

Risks

• World crisis (ie. war, tourism and epidemic outbreak); shutdown of KLIA and KLIA2; and the development of high speed train between Singapore and Pulau Pinang.

Forecasts

• After imputing numbers from annual report, we adjusted FY16-18 earnings by +3.1%, -0.3% and +1.3% respectively.

Rating

BUY

Positives

• 1) Monopoly of airports operation in Malaysia (except Senai); 2) Main beneficiary government initiatives to boost tourism; 3) Concession extension for another 35 years to 2069; 4) Unaffected by RM depreciation; and 5) Potentially higher non-aeronautical revenue.

Negatives

• 1) Low liquidity.

Valuation

• We maintain our BUY recommendation with higher TP of RM7.50 (from RM6.80) based on DCFE, after we roll forward our valuation into FY17 and stronger cash flow expectation. We expect MAHB to declare higher dividends going forward.

Source: Hong Leong Investment Bank Research - 18 Apr 2016