Malaysia Airports (MAHB) reported a decent set of results – 1Q19 revenue grew by 3% yoy tracking passenger growth. While 1Q19 core net profit of RM149m was 6% lower yoy, it was substantially higher than the RM27m recorded in 4Q18. All in, the results were above street and our forecasts. We raise our 2019-21E EPS forecasts by 9- 13%, roll forward our valuation horizon and lift our DCF-derived TP to RM8.60 (from RM8.20). MAHB’s share price has fallen by 10% over the past 3-month due to concerns on rising competition, a depreciating Turkish Lira and weak market conditions. At 7.5X 2020E EV/EBITDA, valuations look appealing for an airport operator, upgrade to BUY (from HOLD).

Higher Revenue But Earnings Slipped on Costs; Above Expectations

MAHB’s 1Q19 revenue grew by 3% to RM1.25bn on higher contribution from both Malaysia (+3.1% yoy) and Turkey operations (+2.6% yoy), driven by a 3.7% yoy increase in passenger movements to 33.4m. Excluding RM26m construction revenue booked in 1Q18, core revenue from Turkey grew by 13% yoy on passenger growth and introduction of PSSC of EUR3 for departing international passengers. MAHB’s 1Q19 EBITDA margin however slipped by 3% yoy to RM534m due to higher utilities costs (rising electricity tariff), higher repair and maintenance costs (to meet the Quality of Service targets), and provision of doubtful debts in relation with the dispute with AirAsia Group of companies. The lower EBITDA resulted in a 5.5% drop in net profit to RM149.1m. Overall, the results were above street and our expectations – 1Q19 net profit account for 29% of the street and 32% of our previous full year earnings forecasts. Key variation is lower than expected escalation in operating costs.

Sequentially, 1Q19 Profit Has Recovered Strongly From a Low Base

Sequentially, MAHB’s 1Q19 core net profit rebounded by 450% from the RM27.1m recorded in 4Q18. Recall that MAHB booked in high expenses in 4Q18 (ie. provisions for doubtful debts, repair and maintenance costs, employee benefits). We note that MAHB has historically booked in higher staff costs and provisions in the 4Q.

Raising 2019-21E EPS Forecasts by 9-13%, Lifting TP to RM8.60

We have raised our 2019-21E earnings forecasts by 9-13%, incorporating milder increase in operating expenses (ie. staff costs, repair and maintenance costs). We lift our DCF-derived 12-month target price to RM8.60 (from RM8.20) after incorporating our earnings upgrade. We have also rolled forward our valuation horizon to 2020.

Source: Affin Hwang Research - 3 Jun 2019