We maintain our HOLD rating on Malaysia Airports (MAHB) with a lower SOTP-derived price target of RM7.50 (from RM8.50) after cutting our 2020-21E earnings forecasts by 8-9% in anticipation of a prolonged deferment in the RAB implementation, where there is also a high risk of cancellation. Operationally, the key earnings drivers (passenger movement growth, cost efficiency) remain positive and should support MAHB’s 2020-21E earnings growth; however, the protracted discussions on OAs remain a risk to earnings. MAHB’s share price has fallen by 18% over the past 3 months partly due to this. At 19x 2020E PER, MAHB’s valuation is comparable to global peers and looks fair.

We Do Not Expect Implementation of RAB in the Foreseeable Future

Taking into consideration the proposed CAAM-Mavcom merger and Mavcom’s press release, where its executive chairman Dr Nungsari Ahmad Radhi said he will now focus on the welfare of the staff and a responsible handover, we expect the implementation of the RAB to be deferred for the foreseeable future and see the risk of an outright cancellation as also high. Separately, the discussions on OAs between MAHB and MOT are not forthcoming – the recent resignation of MAHB’s CEO, Raja Azmi, may further delay the finalisation / signings of the OAs.

Status Quo: Flat PSC, Rising User Fees, Deferment in Infra Upgrades

Under the prevailing OAs, we now expect the Malaysian PSC to stay flat in 2020-21E and MAHB to continue paying a rising user fee. While these are not detrimental to MAHB’s profitability, investors (including us) were expecting a higher financial return under the RAB framework. Elsewhere, MAHB will likely defer its infrastructure upgrades (ie, baggage handling system, Aerotrain at KLIA) and this may affect its operational efficiency.

Cutting 2020-21E EPS by 8-9%, Maintain HOLD With a Lower TP

We cut our 2020-21E EPS by 8-9% after reversing the financial impact of the RAB framework. This includes lowering our PSC and capex forecasts and raising the user fee projections. Operationally, MAHB’s business outlook remains healthy; we expect higher passenger movements, good cost efficiencies and lower finance costs for the Turkey business to drive a 3-9% growth in MAHB’s 2020-21E EPS. We maintain our HOLD rating with a lower SOTP-derived TP of RM7.50 (from RM8.50) after incorporating our earnings cuts and lowering our discount rate for the Malaysian operations in view of the lesser policy risk in relation to RAB.

Source: Affin Hwang Research - 9 Jan 2020