Reported core earning of RM148.7m for 1QFY19, above both HLIB’s expectation (25.8%) and consensus (28.5%) driven by higher effective tariff charges (for Malaysia and ISGA), lower net finance cost and lower effective tax. Raise FY19- 20 earnings by 12.2% and 13.3% respectively and introduce FY21 earning at RM746m. Maintain HOLD with higher DCFE-derived TP of RM7.80 (from RM7.50), given the concern of earnings risk under RAB and AREIT structure.

Above expectations. Reported core PATMI of RM148.7m for 1QFY19, came in above both HLIB’s expectation for FY19 (25.8%) and consensus (28.5%), due to: 1) recognition of MARCs of RM13m post effective increase in benchmark tariff rate in Feb 2019; 2) implementation of PSSC charges of EUR3 for departing int’l passenger in ISGA since starting 2019; 3) lower net finance charges; and 4) lower effective tax rate due to utilization of investment tax allowance (related to KLIA2). We expect higher earnings from ISGA in subsequent seasonal stronger 2Q and 3Q.

Dividend. None.

QoQ. While revenue was flattish, core PATMI improved 155.4% mainly due to lower operational costs in Malaysia in relation to staff (bonus provision in 4QFY18) and maintenance (accelerated opex to meet the newly implemented Quality-of-Service for airports in 4QFY18).

YoY. Core PATMI increased by 24.0% mainly due to lower net finance costs, following the repayment of ISGA debts (amounting to RM173m in FY18) and lower effective tax rate following the change in accounting treatment for KLIA2’s ITA in mid- 2018).

OA vs. RAB vs. AREIT. MAVCOM has agreed with MAHB’s proposal to delay the implementation of RAB into 2020 (previously July 2019). However, the structure of RAB has yet to be finalised yet, as RAB framework need to be in line with the new Operating Agreement (OA) while preparing for future AREIT implementation. On a positive note, MAHB has signed OA with GoM pertaining to the extension of concession to 2069 (from 2034). MAHB has also recognised MARCs of RM13m in 1QFY19, following its entitlement for a benchmark tariff hike in mid Feb 2019.

ISGA turnaround. ISGA continued to show strong momentum with maiden 1Q profit (albeit minimal) despite a seasonal slow quarter of the year, due to strong increase in international traffic and the implementation of EUR3 PSSC charges for departing international passengers, as well as lower net finance costs. Despite the many concerns on the risk of the new Grand Istanbul Airport, ISGA has been benefiting from increasing international traffic flow due to the latter’s better connectivity to city centre. The recent terminal capacity expansion to 41mppa and upcoming complete construction of runway 2 will further enhance ISGA’s traffic flow. We expect ISGA to record maiden full year profit in 2019.

Forecast. Raise FY19-20 earnings by 12.2% and 13.3% respectively on higher tariff assumptions and lower net finance costs. Introduce FY21 earning at RM746m.

Maintain HOLD, TP: RM7.80. We maintain HOLD recommendation on MAHB with higher DCFE-derived TP of RM7.80 (from RM7.50), given the heightened earnings risk outlook under the upcoming RAB structure and the proposed AREIT.

Source: Hong Leong Investment Bank Research - 3 Jun 2019