Highlights/ Comments

• For 1Q16, passenger traffic growth has been stronger than MAHB’s target for FY16. MAHB recorded +3.4% yoy vs. target of +2.5% yoy, while ISGA recorded +19.6% yoy vs. target of +10.8% yoy. MAHB does not expect further capacity cuts by MAS, while AirAsia Group and Malindo Air as well as foreign airlines are expected to increase capacities especially towards 2H16, which bode well for MAHB’s earnings growth from aeronautical and nonaeronautical segments.

• The movement of Malindo Air operation into KLIA-MTB from KLIA2 (since mid-March 2016), will further improve MAHB’s earnings, given the higher tariff charges and MARCS collection in KLIA-MTB. The movement of AirAsia operation from KK-LCCT (similar charges to KLIA2) to KKIA (similar charges to KLIA-MTB) since Dec 2015 will also contribute to stronger earnings in FY16.

• There is increasing traffic on China Sector due to normalization impacts from MH307 and MH17 back in 2014. Ministry of Tourism is working towards promoting Malaysia into China market with various programmes, reinforced by easing of visa applications and visa waiver. There is also increasing connectivity into China as both local and foreign airlines increase capacities, frequencies and new routes. Growth is expected to be double digit for China Sector (contributing ~10% of total traffic).

• ISG (including LGM) recorded minor losses of EU€3.8m in 1Q16 (seasonally weakest quarter of the year). With the continued strong double-digit passenger growth, ISG is expected to start turning around (excluding consolidated amortization of EU€11.6m per quarter) and likely to contribute positively to MAHB’s bottomline from 2Q16 onwards. ISG is spending EU€20m to expand its capacity to 41mppa (currently 33mppa) by 2018 (concurrent with completion of an additional runway, which is borne by Turkey Government), given its current high utilization rate of circa 85%.

Risks

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

Forecasts

• Unchanged.

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 unchanged TP of RM7.50 based on DCFE. We remain positive on MAHB outlook on the back of air travel recovery in Malaysia and continued strong growth in Turkey, as well as the long term growth from commercial land development Aeropolis.

Source: Hong Leong Investment Bank Research - 29 Apr 2016