Passenger  numbers  in  line.  MAHB  recorded  a  total  of  60.6m  passengers  in  11MFY12, representing a growth of 4.7% YTD. With December being a peak period for air travel, we expect  MAHB  to  end  the  year  with  a  5%  passenger  growth,  which  is  in  line  our  and consensus' expectations. We have  a  11%  passenger  growth  forecast  for  FY13,  far  ahead of MAHB's KPI target of 7.1%, which we deem too conservative.

4Q  likely  within  expectations.  4QFY12  earnings  is  expected  to  come  in  at  RM132m, representing a 40% y-o-y and a 22% q-o-q increase respectively. We foresee that earnings will  be  driven  by  strong  passenger  numbers  (+8.4%  y-o-y,  +8.7%  q-o-q),  which  in  turn translates  to  higher  non-aeronautical  revenue.  Unfortunately,  the  airport  operator  would likely  see  its  earnings  hit  by  provisions  following  the  termination  of  the  Male  Airport concessionaire, although this will not hit our core earnings estimate.  

Higher  User  Fee  to  be  incurred.  Management  guided  that  FY13  earnings  will  be  lower due to the higher User Fee it will have to pay to the Government. Upon the full settlement of the Balance Residual Payment in 1Q13 under its new operating agreement signed back in 2009, the User Fee will thereafter be fully recognized in the income statement. The higher User Fee is estimated to be in the tune of RM220m-RM240m in FY13, which is double the amount MAHB is expected to incur in FY12. Due to the higher User Fee, we are trimming our  FY13  and  FY14  earnings  by  35%  and  32%  respectively.  We  have  also  factored  in  a higher cost assumption to operate the upcoming KLIA2.

BUY. We lower our FV to RM7.23 following the earnings downgrade, premised on a WACC assumption  of  7.6%  after  revising  our  CAPM  variables.  We  continue  to  like  MAHB's prospects  for  its  non-aeronautical  revenue  from  the  upcoming  opening  of  the  KLIA2 sustained by the growing demand in the low cost travel segment.   

2013  to  be  a  better  year  for  passenger  growth.  MAHB  recorded  a  total  of  60.6m passengers in 11MFY12, representing a growth of 4.7% YTD. With December being a peak period for air travel, we expect MAHB to end the year with a 5% passenger growth, which is in line with our and consensus' expectations. We understand that both MAS and AirAsia had in December took in delivery of nine and five aircraft respectively, which could result a surge  in  passenger  traffic.  For  2013,  we  forecast  a  11%  passenger  growth,  far  ahead  of MAHB's KPI of 7.1%,  which  we  think  is  too  conservative  considering  that  AirAsia  and AirAsia  X  are  expected  to  see  10  and  seven  aircraft  delivered  in  2013  respectively.  The setting up of a new airline, Malindo, will also boost MAHB's passenger numbers while MAS will also be increasing the frequency of its short- to mid-haul segment after scaling back its long haul operations last  year  due  to  route  rationalization. The  capacity  expansion  by  low cost carriers in Thailand should also bode well for the airport operator.
 
FY12  and  4QFY12  to  be  within  expectations.  After  revising  our  estimates  down  to remove  any  contribution  from  associate  Male  Airport  for  4Q  following  the  concession termination  by  the  Male  government,  we  anticipate  that  MAHB  will  see  a  full-year  core earnings  contribution  of  RM458m  (previously  RM463m)  on  the  back  of  RM2.15bn  in revenue.  For  9MFY12,  MAHB  recorded  a  core  net  profit  of  RM326m,  which  accounts  for 71%  of  our  new  FY12  forecast.  4Q  earnings  is  expected  to  come  in  at  RM132m, representing a 40% y-o-y and a 22% q-o-q increase respectively, of which earnings will be driven  by  stronger  passenger  numbers  (+8.4%  y-o-y,  +8.7%  q-o-q),  hence  translating  to higher  non  aeronautical  revenues.  MAHB  is  scheduled  to  release  its  earnings  on  the  18 Feb.
 
Compensation  for  Male  Airport.  MAHB  would  likely  see  its  earnings  hit  by  provisions following  the  termination  of  the  Male  Airport  concessionaire  although  this  will  not  hit  our core  earnings  estimate.  Compensation  for  the  termination  is  likely  and  Management  is seeking  higher  compensation  due  to  the  loss  of  future  potential  revenue.  As  of  to  date, MAHB has invested a total equity of USD6.9m (equivalent to RM21.5m) and has accounted for  an  accumulated  share  of  associate  profits  of  approximately  USD13.2m  (equivalent  to RM41.2  million).  In  any  case,  any  compensation  will  not  impact  on  our  FV  due  to  the exceptional nature of the item.

2013  and  beyond  to  take  a  hit  on  higher  user  fee.  Many  question  why MAHB's KPI forecasted  2013  EBITDA  of  RM751m,  which  is  lower  than  our  FY12  forecast  of  RM840m and the RM737m it achieved back in 2011. Management guided that FY13 earnings will be hit by the higher User Fee to be paid to the Government. Currently, only half of the actual User Fee paid by MAHB to the Government is reflected in the income statement whilst the other  half  is  deducted  from  the  amount  due  (parked  in  non-current  payables)  for  the Balance Residual Payment arising from MAHB's restructuring exercise completed back in February  2009.  Originally  when  the  restructuring  exercise  was  done,  the  amount  of  the Balance  Residual  Payment  was  RM419m  and  by  1QFY13,  MAHB  is  expected  to  have  a balance of only RM25m-RM30m. Upon the full settlement of the Balance Residual Payment in  1Q13,  the  User  Fee  incurred  will  be  fully  recognised  in  the  income  statement  and  as such, 100% of the User Fee to be paid to the government will be reflected in the net income moving  forward.  The  User  Fee  is  expected  to  be the  tune of  RM220m-RM240m,  which  is more than double the RM103m MAHB is expected to incur in FY12 and the RM84.2m it had incurred in FY11. 

Trimming  earnings.  Due  to  the  higher  User  Fee  expected  to  be  forked  out,  earnings  for FY13 will take a hit. Consequently, we trim our FY13 and FY14 earnings by 35% and 32% respectively. We have also factored in a higher cost assumption for operating the upcoming KLIA2 as we anticipate that direct overheads, utilities and maintenance costs will increase by  30%  and  15%  y-o-y  in  FY13  and  FY14  respectively,  premised  on  the  assumption  that the KLIA2 will commence operation by 28 June.

Delay  in  the  opening  of  KLIA2?  MAHB  is  committed  to  see  KLIA2  commencing operations by 28 June 2013 as announced by the Prime Minister. Any delay in the airport's commencement will likely be attributed to completion of a new runaway and its apron. Even if this is likely the case, we foresee that the upcoming KLIA2 will still be able to operate with its existing two runaways although this would not bode well for airline operators due to the long  taxi  for  take-off  and  traffic  congestion.  However,  we  understood  from  AirAsia  that based  on  the  current  rate  of  aircraft  delivery,  the  existing  runaways  in  KLIA  will  still  be enough to accommodate the low cost carrier's expansion until next year. Furthermore, we understand that of the 10 aircraft to be delivered this year, not all will be placed at its hub in Kuala Lumpur as some will be dedicated to serve in its hubs in Kota Kinabalu and Johor.

It's the cash flow...  Whilst  earnings  are  expected to drop, we highlight that MAHB's operating cash flow is expected to improve from FY13 onwards. FY13 operating cashflow is expected to be bumped up to RM689m from RM573m in FY12f. Due to the fact that MAHB will  still  incur  substantial  capex  for  the  remaining  construction  of  the  KLIA2,  the  capex  for this  year  is  still  expected  to  be  significant  -  to  the  tune  of  RM1bn-RM1.1bn.  Most  of  the capex  allocation  in  the  immediate  term  will  be  funded  by  the  remaining  drawdown  of  its sukuk facility and through its recently announced dividend reinvestment plan. MAHB's Free cash  flow  to  firm  is  only  expected  to  turn  positive  by  2014  -  we  estimate  the  figure  to  be RM597m.  This  amount  is  a  reversal  from  the  negative  free  cash  flow  of  RM828.5m  and RM411m MAHB incurred in FY12 and FY13.

Higher  dividends  seen? We are nudging up our dividends from a 50% payout to a 60% payout  as  we  estimate  that  MAHB  would  not  take  into  account  the  higher  depreciation charges  starting  this  year  in  determining  its  overall  dividend  payout  considering  the likelihood  of  its  Malaysian  concessions  being  extended.  For  simplicity,  due  to  the  lack  of clarity  on  the  take  up  rate  of  its  dividend  reinvestment  plan  (DRP),  we  have  not incorporated any DRP take up rate in our assumption. At 60% payout, this would translate to  a  yield  of  2.4%  and  3.5%  in  FY13  and  FY14  respectively.  Our  assumptions  are considered conservative as we expect its Free cash flow to equity (FCFE)  - after changes in borrowing repayments etc -  to bump up to RM438m in FY14 from a negative FCFE of RM242.7m in FY13.

Maintain  BUY.  We  maintain  our  BUY  call  but  we  lower  our  FV  to  RM7.23  following  the earnings  downgrade  of  35%  and  32%  in  FY13  and  FY14  respectively.  Despite  the  lower earnings, a further drop in our FV is cushioned by a lower WACC assumption of 7.6% from 9.1%  earlier  after  revising  our  CAPM  variables,  notably  on  the  lower  expected  market return  given  the  risk  of  the  impending  General  Election.  Although  on  a  FY12  and  FY13 EV/EBITDA  perspective,  MAHB  is  15%  pricier  than  Airports  of  Thailand  (BUY,  FV: THB120)  currently,  we  think  the  slight  premium  is  warranted  in  view  of  the former's operational free cash flow turnaround. A comparison on a PE multiple basis would prove to be  meaningless  given  the  high  depreciation  expense  pending  the  concession  extensions expected to be granted by the Government after the General Election. We continue to like MAHB's outlook and its KLIA2 story which would boost its cash flow from FY14 onwards, its first positive free cash flow since 2007.

Source: OSK