News  Yesterday, Malaysia Airports Holdings (AIRPORT) announced that it has exercised its rights of first refusal in respect of the proposed acquisition of a 40% equity stake in each of Istanbul Sabiha Gökçen Uluslararasi Havalimani Yatirim Yapim Ve Işletme A.Ş. (“ISG”) (EUR157.5m) and LGM Havalimani Işletmeleri Ticaret Ve Turizm A.Ş. (“LGM”) (EUR67.5m) for a total consideration of EUR225m or RM1.0b equivalent and also proposed a private placement of up to 10%.

Comments  We are not surprised with the announcement on the proposed acquisition for the 40% equity stake in each of ISG and LGM from GMR Group and the proposed private placement of up to 10% to fund the acquisition, as AIRPORT had always been interested to increase its investment exposure abroad.

 The offer price of EUR157.5m for the 40% stake in ISG is 25% higher than our newly adjusted DCF valuation of EUR315.7m. However, we deem that the total purchase consideration of EUR225m after including the offer price of EUR67.5m on the 40% stake in LGM is still fair as it would only translate to 15x FY12 EV/EBITDA which is still inline with the industry average of 14.7x.

 The bulk of the purchase consideration of EUR225m (RM1.0b) would likely be satisfied by the proposed 10% private placement while the balance would be from internally generated funds. Based on the indicative issue price of RM8.09 for the new shares, it would raise c.RM997m and have a dilution impact of 7% on its FY14E EPS of 37.7sen which is minimal. Hence, we are rather positive with AIRPORT’s move on the new placement given the minimal dilution impact and it also would improve it’s gearing level from 0.81x to 0.68x.

Outlook  We are still optimistic on MAHB’s outlook underpinned by steady traffic growth and believe the next re-rating catalyst would be the upcoming PSC revision and Concession Agreement Extension with the government.

Forecast  No change to our earnings estimates at this juncture. However, we’ll look to adjust our earnings downwards post completion of the purchase as we consolidate the accounts for ISG and LGM.

Rating Maintain MARKET PERFORM

Valuation  We raised our TP marginally by 2% from RM8.48 to RM8.67 based on SoP, following our newly adjustment DCF valuation on ISG. The current share price implies 25.5x PER to our FY14E EPS.

Risks to Our Call A significant drop in passenger numbers due to catastrophic events

Source: Kenanga