We visited Malaysia Airports (“AIRPORT”) recently and came back feeling positive with its long-term outlook. Its management is confident of meeting the opening deadline for KLIA2 on 2nd May 2014. The construction of KLIA2 is progressing with 94% completion and AIRPORT will be conducting a take off and landing test on its 3rd runway next month. Meanwhile, the integrated complex called Gateway, which is a jointventure with WCT will be ready and open for business concurrently with KLIA2. We believe that 2014 would be a good year for AIRPORT due to the possible passenger service charges hike coupled with the Visit Malaysia year campaign. However, we are downgrading our recommendation on AIRPORT to MARKET PERFORM from OUTPERFORM given the limited upside to our SOP-based Target Price of RM7.72.

KLIA2 progress @ 94%. During our meeting, management reiterated that the delay of KLIA2 was due to changes in design where the initial plan for 30m passenger was raised to 45m passengers, resulting in a longer construction time-frame. However, this time around management is confident that there will be no further delay in KLIA2 as the current construction progress is well on track at 94% as compared to 92% in June, and reaffirmed that KLIA2 will be opened for the public on 2nd May 2014. The physical construction is expected to complete by November, and another 1-2 months is required to obtain Certificate of Completion and Compliance (CCC) and after that getting the Operational Readiness & Airport Transfer (ORAT) in the final three months.

LAD charges not an issue, at this juncture. As we understand from the management, there are not many issues on the LAD charges issued to the main contractors of KLIA2 namely UEM-Bina Puri JV due to the delays at this juncture given that the current main focus is to get KLIA2 ready on time. At the same time, AIRPORT will be set off the total LAD charge of RM63.4m against the progressive payment to the contractors, a move seen as widely within our expectation.

Gateway @ KLIA2 and Mitsui Outlet park a value-added investment. AIRPORT owns 30% equity stake in Gateway @ KLIA2 and Mitsui Outlet park, respectively. Gateway @ KLIA2 is set to open together with KLIA2 and management does not expect Gateway to be profitable for the first two years of operations due to the gestation period. However, they are still expecting RM7m-RM8m contribution per annum from that particular investment from its revenue sharing agreement with WCT. While Mitsui Outlet park is only operational in 2015, management expects the contribution to be generally similar to Gateway @ KLIA2.

2014, a good year ahead. We are largely positive with AIRPORT’s outlook moving into 2014, given that AIRPORT is due to revise higher its passenger service charges (upon approval from government) along with its landing and parking charges in 2014, which coincides with the Visit Malaysia year campaign. The Ministry of Tourism is targeting 28m tourists to the country next year. Although there could be possibilities that the hike charges may be delayed, we are still positive on AIRPORT on expected better passenger traffic flow due to Visit Malaysia year.

Foreign shareholding at its peak. Although the foreign shareholding level in MAHB at June 13 at 17% was the highest, management would not be surprised if this figure has trended higher to the 20% level after recent share price run-up. Historically, its foreign shareholding was at 14% in 2012 and at a low of 3% back in 2004.

Downgrading to MARKET PERFORM. While AIRPORT’s long-term outlook remains positive, we are downgrading AIRPORT to MARKET PERFROM from our previous OUTPERFORM recommendation given the limited upside to our SOP-based Target Price of RM7.72 due to the recent share price run-up coupled with high foreign shareholding levels.

Source: Kenanga