Period  2Q14/1H14

Actual vs. Expectations Malaysia Airports Holdings (AIRPORT)’s registered core earnings of RM146.9m which was below our estimate and consensus, accounting for 32% and 38%, respectively. The lower-than-expected results were mainly due to higher-than-expected depreciation and financing cost arising from the opening of KLIA2. We assumed a longer depreciation period after factoring in the potential 25 years extension on its current operating agreement, which is yet to be approved by the Malaysian Government. However, its 1H14 EBITDA of RM445.7m was inline with our FY14 full-year estimates of RM976.7m.

Dividends  No dividend was declared as expected.

Key Results Highlights YoY, AIRPORT saw its core earnings lower by 36% in 1H14 from RM227.8m to RM146.9m. The decline in earnings are mainly driven by higher operating costs due to the opening of KLIA2 like utility costs (+34.4%), staff costs (+10.7%), which is in tandem with the increase of power consumption and tariff hike coupled with a higher number of workforce for the support of KLIA2 operations. In relation to the opening of KLIA2, its depreciation (+60.6%) and finance cost (+227.3%) also saw significant increases to RM200.5m and RM44.1m, respectively. Apart from its Malaysian operations, AIRPORT recorded a higher share of JCE losses of RM53.6m due to one-off recognition (RM42.5mil) and current period losses (RM12.0mil) for Sabiha Gokcen International Airport (SGIA). The oneoff loss recognition of SGIA’s previous losses was due to AIRPORT’s increased equity stake in SGIA from 20% to 60% after AIRPORT acquired the additional 40% from GMR Infrastructure Ltd.

 QoQ, AIRPORT’s 2Q14 core earnings plummeted by 89% to RM14.9m also mainly driven by the reasons stated above, i.e. higher operating, depreciation and finance cost due to the opening of KLIA2. However, AIRPORT’s revenue saw an increase of 51% to

RM1175.5m mainly driven by higher construction revenue (+344.7%) from RM121.6m to RM540.8m as AIRPORT fully recognised the construction revenue for KLIA2.

Outlook  Moving forward, we would expect its traffic in 2H14 to grow at a slower pace as compared to 1H14, which saw an 11.8%, increase in passenger movements due to the series of unfortunate incidents that hit the aviation industry.

 Post-opening of KLIA2, we would still be expecting AIRPORT to actively pursue its operating agreement extension by another 25 years from the Malaysian Government from its current 20 years to 45 years as it would potentially lower its depreciation cost for KLIA2.

Changes to Forecasts  We reduced our FY14-15 earnings estimates by 54%-55% to RM212.6m and RM221.8m, respectively as we factored in a higher depreciation cost and finance cost due to KLIA2. Previously, our depreciation cost assumption for KLIA2 was based on 45 years and currently we are lowering it back to 20 years as AIRPORT has yet to receive approval for the extension of another 25 years for its existing operating agreement.

Rating Maintain MARKET PERFORM

Valuation  We lowered AIRPORT’s SoP-based TP of RM8.06 (previously, RM8.63 refer overleaf for more details) as we lowered our FY14 EV/EBITDA from 13x to 12.2x (from +1SD to +0.5SD) given that there is no near term catalyst for the company and we would expect knee-jerk reaction on its share price due to the recent disappointing results and also to better reflect the negative sentiment in the aviation industry arising from a sequence of aviation incidents involving airlines globally which could potentially affect AIRPORT. However, we are keeping our MARKET PERFORM call as its risks are limited at this juncture and management are committed to maintain a dividend per share of 13sen as guided in previous road shows.

Risks to Our Call  Inability to maintain its dividend commitment as per guided previously.

 Significant drop in passenger numbers due to catastrophic events.

 Higher-than-expected operational costs (i.e. utility costs, staff costs and etc.)

Source: Kenanga