Results

• Below expectations - Reported core profits of RM3.9m for 3Q16 and RM21.5m for 9M16, achieving 31.7% of HLIB’s forecasted FY16 earnings of RM67.9m and 26.0% of consensus of RM82.6m.

Deviations

• Dragged by poor performance of ISGA on weak passenger traffic and higher effective tax charges of RM21.7m due to write-off of expiring tax losses brought forward. Under Turkish law, tax losses can only be carried forward for 5 years after which they can no longer be utilized. Expect further charges for upcoming quarters.

Dividends

• None.

Highlights

• YoY: Group earnings dropped by 84.9%, dragged down by ISGA operation. Malaysia operation was healthy with improved core earnings of RM83m in 3Q16 (vs. RM48m in 3Q15) on the back of higher revenue of RM806.9m (+9.8% yoy) due to stronger traffics, higher average tariffs and spending by passengers.

• QoQ: Similarly, group earnings fell by 34.7% qoq on worsened ISGA performance. Malaysia operation’s core earnings increased by 9.2% on the back of higher revenue by +5.7%, on stronger traffics and passengers’ spending.

• YTD: Group’s core earnings rebounded to profit of RM21.5m (vs. loss of RM43.7m) on the back of stronger traffics by MAHB (higher profit) and ISGA (lower loss) as well as improved revenue mix (Malindo moved to KLIA-MTB from KLIA2 since March 2016).

• Outlook: Expect earnings from Malaysia operation to continue improving in 4Q16 from ongoing recovery of air travel demand, coupled with seasonally peak demand in 4Q. However, ISGA will likely to continue its drag on MAHB in 4Q on seasonally lower travel demand as well as continue write-off of expiring tax losses brought forward (non-cash item in the immediate term, but will diminish ISGA rights to offset the accumulated losses from future profits).

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 FY16E by 24.3%, while FY17-18F earnings are relatively unchanged, mainly to account for slower turnaround for ISGA and tax impact.

Rating

HOLD ↔, TP: RM6.60 ↓

• MAHB is expected to be the major beneficiary from the recovery of air travel demand in Malaysia as well as on going land development initiatives (under KLIA Aeropolis Masterplan). However, near term outlook will be dragged by the weak ISGA performance, due to recent series of terrorists attacks in Turkey as well as deferred tax write off.

Valuation

• With the lower earnings, we cut our TP to RM6.60 (from RM6.70) based on DCF. We maintain HOLD recommendation on MAHB. The upcoming PSC revision is expected to be relatively neutral to MAHB.

Source: Hong Leong Investment Bank Research - 28 Oct 2016