Highlights/ Comments

• YTD (May), MAHB has achieved strong passenger traffic growth of +11.8% yoy for Malaysia operation. We expect the positive trend to continue in 2017, driven by growing tourist arrivals and resilient air travel demand by locals as well as capacity expansion by major Malaysia based airlines.

• The growth was driven by Non-Asean International traffic, which is positive for MAHB, on higher tariff rates of RM50- 73/pax and higher average retail spending/pax.

• We have imputed a high passenger traffic growth of +8.0% yoy for 2017 (vs. MAHB’s targeted +6.5% yoy), even after taking into account of the higher base effect in 2H17.

• Management has guided upcoming capex of RM1.5-2.5bn (lower than HLIB’s initial assumption of RM3bn) to increase the capacity of KLIA-MTB to 40-45mppa (from 30mppa), given the current high utilization rate of >90%. However, the construction is only expected to start in 2018-19, after MAHB can finalize the terms (of MARCS and Concession extension) with government.

• MAHB will remain focus on developing KLIA Aeropolis to boost its non-aeronautical revenue, by leveraging on the expected strong passenger traffic growth (from current 52mppa to 100mppa by 2030).

• MAHB will continue to implement its existing business model on developing KLIA Aeropolis i.e. through lease income, share of profit and concession fee. Both initial investment in to Mitsui Outlet Park and KLIA2 Gateway since 2010 have started to bear fruits with positive contribution in 2016. Recent development includes land lease out to logistic and MRO players (terms of contracts not yet concluded).

• ISGA has been reporting positive growths in recent months (Mar-May), after drops since mid-2016. ISGA believes Turkey is in a better position now with a more stable government, better prospect for tourism industry. We are further encouraged with ISGA being operational cashflow self-sustaining competence. MAHB is currently in talks to monetize parts of its investment in ISGA (selling minority stake), which may further improve MAHB’s cashflow.

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

• Raised our profit forecasts for 2017-2019 by 5.1%, 3.9% and 4.0% respectively.

Rating

BUY ↔

• MAHB is expected to be the major beneficiary from the growth of air travel demand in Malaysia as well as on-going land development initiatives (under KLIA Aeropolis Masterplan). The recovery of ISGA traffic in recent months will improve ISGA outlook and monetizing of ISGA investment will unlock ISGA valuation.

Valuation

• We maintain our BUY recommendation with higher TP RM9.80 (from RM8.60) based on DCF.

Source: Hong Leong Investment Bank Research - 16 Jun 2017