Turkish disappointment

MAHB’s overall passenger traffic growth was broadly in-line with expectations but was mainly supported by recovery from Malaysia operations as its Turkey operations disappointed on tourism slowdown. Ongoing drag from Turkey operations could negate any earnings boost from the higher PSC effective in 2017. Shares are trading above mean valuation despite multiple earnings disappointments. Maintain SELL.

Deteriorating outlook in Turkey

Total passenger traffic grew 5.6% ytd, mainly driven by strong recovery in Malaysia operations on the resumption of several routes by British Airways, All Nippon Airways etc and the return of Chinese tourists. Turkey operations (ISG), however, disappointed with a 5.3% passenger growth ytd, a stark decline from the high double-digits just one year ago. Recent terrorist attacks and the failed coup attempt have affected tourist arrivals, and there is little indication of any recovery in the near-term. Tourist arrivals have plummeted 30% in 7M16, a worrying sign for ISG to achieve breakeven by 2018.

Intensifying competition

The opening of Istanbul New Airport (INA) will allow it to accommodate 90m passengers in 2018, and up to 150m passengers when fully-commissioned in 2020. Turkish Airlines has indicated its intention to hub at INA, and could move its aircraft away from ISG. Pegasus Airlines, ISG’s biggest customer, is staying put at ISG, but we expect it to shift some transit and code-sharing routes across to INA. Possible extension to Ataturk Airport’s concessionaire period will likely further intensify competition, a negative for ISG.

Poor profitability generation

We are projecting revenue CAGR of 7% after taking into account the higher blended passenger yield, and net profit CAGR of 151% for FY16-18E, though from a low base, underpinned by 3% increase in passenger traffic. We maintain our negative outlook for MAHB, largely to account for the disappointing profitability with poor ROE generation, rising competition for its Turkey operations, and moderating passenger growth. We reaffirm our SELL rating with a 12-month DCF-based target price of RM5.40 (WACC 7.5%). MAHB is currently trading above mean valuation of close to 9x FY16E EV/EBITDA, which we deem unjustified given deteriorating outlook for ISG. Risk to our call includes a strong rebound in overall passenger traffic.

Source: Affin Hwang Research - 29 Dec 2016