4Q  earnings  boosted  by  lower  airline  incentives.  MAHB's FY12 core earnings of RM474m  (y-o-y:  +9%)  were  3.5%  above  our  forecast,  deemed  in  line,  but  6%  above consensus  on  the  back  of  RM2.16bn  in  revenue  (y-o-y:  +12%). For 4Q, MAHB's core earnings rose by 31% y-o-y and 38% q-o-q as revenue grew by 13% y-o-y and 10% q-o-q respectively  on  the  back  of  seasonally  stronger  passenger  traffic  and  spending.  The earnings surge in the final quarter was largely attributed to lower airline incentives, just as we  had  anticipated.  During  the  quarter,  exceptional  items  totaled  RM103m,  notably  the RM68.9m impairment on its investment in Male following the termination of the concession by the new ruling government and the RM30.5m additional losses from its other associate, Sabiha Gocken.  

Exceeding  KPI  target.  MAHB  recorded  a  FY12  EBITDA  of  RM870m,  surpassing  its EBITDA KPI target of RMRM822m and also our initial forecast of RM840m. Had it forked out the same amount of airline incentives as FY11 (RM65m in FY12 vs RM104m in FY11) it would have probably missed its KPI.EBITDA margin improved from 38% to 40%.  

Per  pax  spending  continues  to  grow.  We  note  that  per  pax  spending  continued  to improve on higher retail space optimization. Per pax spending at duty free Eraman rose by 9%  while  total  KLIA  sales  per  pax  grew  by  4%.  Duty  free  revenue  in  LCCT  has  still  not surpassed  that  from  KLIA  despite  the  higher  passengers  handled  and  per  pax  spending (+6% y-o-y), which is very encouraging as it suggests that the upcoming KLIA2 would see stronger passenger spending due to the various retail therapies it will offer. KLIA2 will have more than 200 shops versus the 60-plus in LCCT currently. We do note, however, that the average  rental  revenue  per  sqm  in  KLIA  and  LCCT  combined  dipped  slightly  as  MAHB was  probably  squeezing  in  more  outlets  at  the  KLIA  satellite  terminal  to  generate  more spending revenue. 

Positive outlook reiterated. We continue to believe that outlook moving forward remains promising  for  MAHB  on  the  back  of  an  expected  higher  non-aeronautical  revenue contribution  from  KLIA2,  which  is  on  track  to  commence  operations  by  end-June. Unlocking  the  value  from  its  landbank  development  is  another  upcoming  catalyst.  We understand that MAHB is currently in discussions with several parties to develop a theme park, golf course, hospital for medical tourism and a shopping mall in KLIA. Management is also  in  active  discussions  to  lure  in  more  carriers  to  hub  in  KLIA,  notably  British  Airways and Qantas following the entry of Malaysian Airlines into the Oneworld Alliance in February this year.  

43% drop in FY13 forecast not alarming. The sharp 43% y-o-y plunge in FY13 earnings forecast is largely attributed to the higher depreciation and amortization costs of the KLIA2 coupled with the higher user fee incurred. Note that FY13 operating cash flow will improve to  RM689m  compared  to  RM643m  in  FY12.  Still,  management  is  hopeful  of  getting  its airport concession extended before the commencement of the KLIA2 in end-June. This will have  a  big  positive  impact  in  its  bottomline  as  it  will  potentially  reduce  amortization  and depreciation expense by as much as half from the RM456m we estimated will be incurred in FY13. Furthermore, FY13 earnings will also be hit by MAHB's substantially high user fee expected  at  approximately  RM200m  vs  RM99m  in  FY12.  As  we  have  highlighted  earlier (see report titled: "Toning Down", dated 30 Jan 2013) the higher user fee charged  only reflected  a  change  in  accounting  charge.  The  user  fee  was  previously  reduced  from  the balance sheet but upon the full settlement of  the balance residual payment in 1QFY13,  it will now eat into MAHB's net income. Hence, the percentage of total revenue paid  and its cash outflow to the government remains unchanged.

Look  at  cash  flow  instead  of  earnings.  We  introduce  our  FY14  numbers.  We  expect earnings  to  grow  by  10%  y-o-y.  For  an  apple  to  apple  comparison,  we  deem  cash  flow earnings  to  be  a  more  appropriate  earnings  gauge.  We  expect  MAHB's operating  cash flow to improve further to RM792m in FY14. Also, in absence of any onerous capex after the completion of the KLIA2, we anticipate its free cash flow to return to positive territory. This gives the possibility for management to potentially dish out higher dividends.  

Maintain BUY. Premised on a WACC of 7.6% and a 0% terminal growth rate, we maintain our  fair  value  for  MAHB  at  RM7.23  with  our  BUY  call  retained.  On  an  EV/EBITDA  basis, this gives an implied value of 11.4x on its FY14 EBITDA. We use FY14 earnings estimate, as  it  is  better  yardstick  in  gauging  its  valuation  due  to  the  full  contribution  of  KLIA2.  At 11.4x implied EV/EBITDA, we deem that the valuation multiple is 15% premium to peers' current  average  but  a  discount  of  15%-20%  to  mature  airports  with  high  free  cash  flowyields.  This  is  justifiable  in  our  view  due  to  the  catalysts  in  store,  namely  KLIA2  and MAHB's land bank development.

1.  The KLIA is currently 80% completed and is on track to commence operations by end-June. Management expects to start operational readiness by end-April. There will be no cost overruns.  

2.  Malindo  is  expected  to  commence  flight  operations  sometime  in  mid  March. Management  understands  that  promotional  ticket  sales  could  kick  off  this weekend. In the interim, Malindo will be operating from KLIA, which is a positive for MAHB due to the higher airport tax charged there.  

3.  Management has an ambitious target for KLIA2's retail - total sales generated by outlets  operating  in  KLIA2  are  expected  to  hit  RM790m  in  FY13.  This  is  sharp improvement  from  the  total  sales  generated  in  LCCT  of  RM447m.  We  are  a  bit more conservative than this.  

4.  Among  the  airlines  that  MAHB  is  in  active  discussions  with,  to  lure  them  in,  is Turkish  Airline.  Note  that  Turkish  Airline  is  undergoing  an  aggressive  branding exercise with the ambition of putting it on par to the likes of Emirates.  

5.  Middle Eastern carriers continue to be very aggressive in expanding  their market shares.  Carriers  such  as  Qatar  Airways  have  seen  their  passenger  numbers  in KLIA outpacing passenger numbers in Singapore's Changi.

6.  Following  MAS' entry  into  the  Oneworld  Alliance,  management  is  hopeful  that British Airways and Qantas could use the KLIA as a hub, connecting passengers from Europe and Australia.   

7.  On the Sabiha Gocken Airport in Istanbul:

8.  Airlines incentive budgeted for FY13 is RM60m vs RM65m in FY12 and RM104m in  FY11.  This  is  due  to  lower  passenger  growth  brought  in  by  the  carriers  given the high bases.

9.  Upon the commencement of KLIA2, LCCT will be refurbished and converted into a cargo warehouse with an expected annual lease rental of RM20m-RM30m. The capex allocated for this is minimal at RM10m.  

10.  Land  bank  development  prospects  remain  exciting  although  this  is  more  of  a longer  term  catalyst.  LOIs  has  been  signed  with  several  parties  to  develop  a theme park and a medical tourism hospital. Currently, management is in the midst of processing an LOI with another party to develop a golf course.  

11.  Court proceedings to recoup investment costs and potential revenue losses from the termination of the Male airport concession are ongoing. MAHB has decided to impair  its  investments  to  be  on  the  conservative  side  although  its  partner  GMR has not decided to.

12.  Foreign shareholding is at an all-time high of 14.4% from 9% in FY11.  

13.  Management is not concerned over the setting up of a High-Speed Rail between Kuala  Lumpur  and  Singapore.  It  expects  that  by  then,  traffic  would  be  well cushioned  and  the  drop  in  passenger  traffic  on  the  KL-Singapore  sector  will  be offset by passenger growth on other sectors as MAHB also stands to benefit from the  Open  Sky  Policy  effective  2015. We  also  understand  that  MAHB  will  not  be compensated by the government in any form if the High-Speed Rail is set up and its  operating  agreement  for  the  airport  concession  would  remain  unchanged.  Based on MAHB's  2011  annual  report,  a  total  of  2.944m  passengers  were handled  on  the  Singapore  (Changi)  -  Kuala  Lumpur  (LCCT/KLIA)  route,  which has seen a CAGR of 11.9% yearly over the past five years. Assuming a 12% y-o-y growth rate for last year, this route represents 8.2% of total passengers handled in KLIA and LCCT combined and 4.9% of total passengers handled by  MAHB. In terms of number of flights, we estimate that this would account for approximately 5%-5.5% of total aircraft movements handled by MAHB's airports in Malaysia.

Source: OSK