Results

• Below expectations - Reported core profits of RM5.0m for 2Q16 and RM15.6m for 1H16, achieving 11.2% of HLIB’s forecasted FY16 earnings of RM139.8m and 15.1% of consensus RM111.2m.

Deviations

• Lower than expected traffic movement in Turkey (due to ongoing terrorist attacks in 1H16), while Malaysia traffic from MAS remained subdued in 1H16.

Dividends

• Declared interim net dividend of 4.0sen, despite EPS for 1H16 of only 0.9sen, indicating MAHB’s healthy cashflow.

Highlights

• Group: Earnings for 2Q16 was relatively weak, being dragged by the still weak MAS operation in Malaysia, while Turkey faced slowdown in international traffics (tourists) on concerns of travel safety into the country.

• MAHB: Excluding Sukuk distribution of RM14.3m, MAHB recorded core earnings of circa RM56m in 2Q16 (vs. RM80m profits in 1Q16 and RM8m losses in 2Q15) on strong revenue of RM763m (+5.9% yoy; +9.9% qoq). With the expectation of continued recovery of tourist arrivals (especially from China) as well as air travel demand from locals in 2H16, we expect exponential earnings growth from both aeronautical and non-aeronautical segments. MAHB also stands to benefit from potential tariff increase in KLIA2 (to match with KLIA) by 2017, which is being proposed by MAVCOM (Malaysia aviation commission).

• ISGA: Excluding the higher consolidated amortization cost RM52.7m, ISGA (including LGM) would have recorded RM RM4.8m losses in 2Q16, an improvement from RM12.3m losses in 1Q16, attributed to new tariff charges on transit passengers (EUR5/int’l pax and EUR1/domestic pax). Given the recent political uncertainties and terrorist attacks in Turkey, we expect international passenger movements to drop in 2H16, before potential recovery in 2017. Similarly, ISGA turnaround will likely be deferred into 2017.

Risks

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

Forecasts

• Cut earnings for FY16 by 51.0%, FY17 by 12.6% and FY18 by 7.4%, mainly to account for slower turnaround for ISGA.

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

• With the lower earnings, we cut our TP to RM6.70 (from RM6.90) based on DCF. However, we upgrade our recommendation to BUY given the recent drop in share price due to Turkey incidents. There is potential earnings upside of RM200m for FY17-18 if the proposal to increase KLIA2 tariff (to KLIA level) is implemented by 2017, which shall raise our TP to RM8.70.

Source: Hong Leong Investment Bank Research - 29 Jul 2016