Malaysia Airports’ (MAHB)’s 2019 core net profit grew by 24% yoy to RM565m on higher revenue (+7.4% yoy) and an improved EBIT margin of 25.2% (from 23.1%). Yet, the results were below our expectations due to a disappointing 4Q19 core net profit of RM59m (- 70% qoq) arising from higher operating expenses. The Covid-19 outbreak is affecting passenger movement and retail sales at MAHB’s airports, and we expect the negative sentiment / travel advisory to persist for a few more months. As such, we cut our 2020- 21E EPS forecasts by 8-15% to account for the impact of the Covid19 outbreak. In tandem, we lower our 12-month SOTP-derived TP to RM6.95 (from RM7.50). Maintain HOLD; at a 20.5x 2020E PER, MAHB’s valuation is comparable to peers and looks fair to us.

2019 Core Profit Grew by 24% on Higher Revenue, Improved Margin

MAHB’s 2019 core net profit grew by 24% yoy to RM565.2m on the back of a higher revenue (+7.4% yoy) and an improved EBIT margin (+2.1 ppt to 25.2%). The Malaysian operation’s 2019 revenue grew by 6.1% yoy on higher passenger movement (+6.1%) while the Turkey operation’s underlying revenue (excluding construction revenue) grew by a strong 18.7% yoy on higher international passenger movement (+20.6% yoy) and an increase in passenger service charges (PSC). Management has proposed a final dividend of 10 sen, translating to a higher full-year dividend per share of 15 sen (2018: 14 sen).

Weak 4Q19 Core Profit of RM59m, Below Our Expectation

MAHB’s 4Q19 core net profit fell by a steep 70% qoq to RM59.3m due to higher operating costs that include: (i) higher staff costs of RM255m (from RM182m in 3Q19) due to provision of staff bonuses; (ii) higher maintenance costs (+RM21m qoq); (iii) provision for the technical glitch (RM7m); and (iv) recognition of RM11.6m of professional fees for its overseas operations. While we had anticipated weaker 4Q19 results (visà-vis 3Q19) due to higher staff costs, the decline was steeper than expected. Overall, the results were below consensus and our expectations – MAHB’s full-year core net profit came in at 96% of consensus and 93% of our previous full-year earnings forecasts. The earnings miss was due to the higher-than-expected operating costs in 4Q19.

Covid-19 to Hit Revenue And, Maybe, Operating Costs

Looking ahead, we expect the Covid-19 outbreak to lessen passenger movements and weaken the retail spending at MAHB’s Malaysian airports. Management shared that the passenger movements at its airports declined by 10-18% during a certain period in February 2020. Also, the flights (to and from) North Asia will be cut by some 30%. The lower passenger movements from the countries with relatively high spending power should, in turn, affect the retail spending at the airports.

Elsewhere, MAHB is still in discussions with the government on the newly announced economic stimulus package, where the government said “MAHB will provide rebates on rental for premises at the airport as well as landing and parking charges”. Management is unable to confirm the amount of rebates to be offered, or whether the government will subsidise the rebates / discounts.

Management Is Still Pursuing the RAB Framework

Management shared that the group is still in discussions with the government (Ministry of Finance, Ministry of Transport) on the Operating Agreements (OAs) and the Regulated Asset Base (RAB). Broadly, management is looking for methods (RAB or alternative framework) to govern the return on its future expansion / renovation capex. Management hopes to conclude these discussions by end-1Q20.

Cutting 2020-21E EPS by 8-15%

We cut our 2020-21 EPS forecasts by 8-15% after incorporating: (i) lower passenger movements and aircraft landings due to the Covid-19 outbreak; (ii) lower retail spending; (iii) higher staff costs; and (iv) lower rentals from its retail operations. We introduce our 2022E earnings forecasts, expecting MAHB to achieve 22% yoy earnings growth driven by higher revenue (+5% yoy), a stable EBITDA margin and flattish depreciation costs / interest charges.

Lowering Price Target to RM6.95, Maintaining HOLD

In tandem with our earnings cuts, we have lowered our SOTP-derived price target to RM6.95 (from RM7.50). Maintain HOLD. MAHB’s share price has declined by 13% in ytd-2020, partly attributable to the tough medium-term business outlook due to the Covid-19 outbreak. At a 20.5x 2020E PER, MAHB’s valuation is comparable to the median valuation of its global peers, looks fair.

Key upside risks: (i) Mavcom to implement the RAB framework prior to the merger; (ii) MOT expressing a more supportive stance on the RAB framework; (iii) favourable outcome from the OAs discussions; and (iv) better-than-expected passenger growth at the Malaysia or Turkey airports. Downside risks are: (i) undesirable outcome from the OAs discussions; and (ii) weaker-than-expected passenger growth.

Source: Affin Hwang Research - 2 Mar 2020