MAHB churned out a respectable quarter against steady margins underpinned by stable passenger traffic growth. 2H should prove to be seasonally stronger to supplement earnings, despite coinciding with the implementation of QoS. Developing headwinds suggest valuations fairly reflects its growth outlook. Maintain HOLD and DCF-based TP of RM9.20.

Within Expectations

MAHB’s 2Q18 core net profit of RM64m (+6.2% yoy) brought 1H18 earnings to RM211m (58% yoy). It was within our and consensus expectation at 52% and 48% of estimates respectively. Revenue grew 5.0% yoy to RM1.15bn in 2Q18, driven by higher passenger movements in Malaysia (+2.3% yoy) and Turkey (+7.2% yoy), and robust non-aeronautical revenue growth (+3.6% yoy).

Core Profit Grows in Tandem With Topline as Margins Hold Steady

2Q18 EBITDA tracked topline growth, at 4.3% yoy. Positively, Turkey halved EBITDA losses for the quarter yoy to -RM6.6m from -RM12m. Favourable associate contributions boosted PBT margins, improving by 3.0ppt to 10.9%. However, accounting for a bonus provision reversal, core profit grew in tandem with the topline.

Expect a Marginally Softer 2H

Going forward, we expect seasonally stronger 2H to compensate for 1H volume growth of 5.2%, to meet management’s FY18 Malaysia passenger traffic growth guidance of 6.3%. It would be more than offset by marginally softer margins against backloaded maintenance cost and normalising effective tax rate. We also highlight that the Lira depreciation is a non-factor to Turkey operation financials but may impact underlying passenger growth. Lastly, the Quality of Service (QoS) implementation in 3Q18 poses a risk to earnings, however, we think MAHB has well met the initial threshold based on management’s feedback.

Maintain HOLD and TP of RM9.20

Despite the encouraging positive reversion in earnings, uncertainties in the proposed regulated asset base (RAB) framework and meeting QoS standards dampens sentiment on MAHB. We maintain our Hold rating and DCF-based TP of RM9.20.

Turkey Operation Remains in the Red

Turkey operation incurred a net loss of RM6.6m in 2Q18 despite growing passenger traffic volume by 12.4% yoy as operating and financing costs remain elevated. However, given the increased scale, it narrowed losses by half, when compared to 2Q17’s losses of RM12.0m.

Despite its routine performance, there may be lingering negative sentiment given the sharp depreciation in the Turkish Lira. However, Istanbul Sabiha Gokcen International Airport (ISG) is insulated against the volatile domestic currency. Around 85-90% of total revenue is denominated in euro while 70% of the operating costs are in Lira, while concession payment and borrowings are in euro as well. That said, ISG is a low cost carrier with domestic passenger traffic consisting some 70% of ISG’s total passenger traffic and close to two-thirds of all passengers are Turkish nationals. As such, passenger traffic growth may be impacted by the domestic turmoil. However, the impact may not be immediately apparent given passenger traffic grew 5% in 2016 despite Ankara bombings back in Oct 2015.

QoS Framework Kicking in

The Quality of Service (QoS) framework incentivises MAHB to meet minimum service thresholds to avoid financial penalties of between 2.65% and 5.03% of aeronautical revenues (top end range for KLIA and KLIA2). QoS framework will be implemented in phases, with the first phase kicking in 3Q18. The initial phase will encapsulate services such as washrooms and equipment availability. The penalties are relatively punitive. For every 1% of aeronautical revenue, it could impact FY19E PBT earnings by around 2.5% based on our estimates. Positively, most of the facilities have been upgraded to meet thresholds set under the initial phase of QoS. However, staff washrooms and the baggage handling system remains a concern to management, to which earnings may be marginally impacted heading into the latter phases.

Key Risks

Downside risks include (i) unexpected events in Turkey that affects ISG and (ii) a sharp decrease in number of passengers in Malaysia. Upside risk: better-thanexpected passenger growth in Turkey and Malaysia.

Source: Affin Hwang Research - 29 Aug 2018