News  Yesterday, Malaysia Airports (AIRPORT) made an announcement that they are exercising their right of first refusal (ROFR) to acquire the remaining 40% equity stake in Istanbul Sabiha Gokcen Uluslararasi Havalimani Yatirim Yapim ve Isletme A.S._ (ISG) and LGM Havalimani Isletmeleri Ticaret ve Turizm A.S._ (LGM) for a cash consideration of EUR285.0m or approximately RM1.17b.

Comments  We were not surprised with the announcement given that the news on AIRPORT exercising its ROFR to acquire the remaining 40% equity stake in ISG and LGM had been widely reported coupled with the fact that this is also inline with AIRPORT’s strategy in strengthening their presence in Turkey and Europe.

 Currently, management is still deliberating on the most appropriate funding structure for the acquisition. However, we believe that there could be a potential rights issuance rather than placement to facilitate the entire acquisition, given that gearing could hit 1.22x should it is financed solely through debt leaving minimal headroom for AIRPORT to maintain its debt covenant whereby gearing should not exceed 1.25x. To recap, AIRPORT has raised RM980.0m back in Mar-14 via new issue of securities for the funding of the additional 40% stake in ISG and LGM, previously.

 Nonetheless, we are neutral on the move taken by AIRPORT to acquire the remaining stake in ISG and LGM despite Sabiha Gocken Airport’s long-term growth potential and other potential spill over effects from the capacity constraints in Ataturk Airport, as the political risk in Turkey remains highly uncertain coupled with the recent ISIS crisis in Turkey.

Outlook  Post opening of KLIA2 in May-14, we would expect better contribution from KLIA2 in 2H14 as management streamlines its operations at the new airport and we are expecting AIRPORT to actively pursue its operating agreement extension by additional 25 years from the Malaysian Government from its current 20 years to 45 years as it would lower the depreciation cost for KLIA2.

Forecast  No changes in forecasts at this juncture, pending affirmation from the upcoming conference call on 24th Oct 2014.

Rating UNDER REVIEW

Valuation  Our Call and TP are placed UNDER REVIEW pending for more confirmation from management on its funding structure on the proposed acquisition as any potential cash call would have a downward revision on our TP. Previously, we have a MARKET PERFORM call with a TP of RM8.06 based on SoP.

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