Post-teleconference, we maintain our neutral view on Malaysia Airports (AIRPORT)’s move in taking full control of Sabiha Gocken International Airport (SGIA) despite the long-term growth prospect. Our main concern on its overseas operations is due to the absence of a local partner coupled with high foreign exchange risk. Nonetheless, we also reduced our FY14-15E earnings by 35-33% to RM169.5-183.2m, respectively, as we further factored in higher operating cost for KLIA2, as we upkeep our earnings model as previous assumptions were overly conservative. Subsequent to our revision in earnings, we also lowered our SoP-based TP by 7.4% from RM8.06 to RM7.46 as we rolled forward to FY15E, while keeping our MARKET PERFORM call. Sabiha Gocken International Airport, cutting both ways.

Management remains confident and upbeat on the long-term prospect of SGIA as it is operating in one of the most important hub regionally and globally. Turkey is one of the fastest growing aviation market in that region that had been growing at a CAGR of 16% in the past 10 years from 2003 – 2013. SGIA is also already benefiting from the spill-over impact from the overcrowding situation in Ataturk Airport as the traffic of c.50m passenger traffic in Ataturk Airport has far exceeded its designed capacity of 24m. However, our major concern on AIRPORT’s move in taking full control of SGIA is largely on its operations in Turkey due to the absence of a strong local partner despite management’s reassurance on SGIA’s operational efficiencies coupled with high foreign exchange risks.

Funding structure still under deliberation. Post-teleconference, we have a better picture on management’s available funding options. While management is still exploring all available funding options, they also highlighted that they might consider the funding option through 100% debt even if it would risk its AAA credit rating should the need arises. However, based on our 50:50 debt to equity assumptions, we opine that AIRPORT could still maintain it’s gearing at 0.7x level without the need for equity by funding its 50% equity portion with perpetual bonds, which we believe could be a better option, as it would not be diluptive to its shareholders and also being able to maintain its AAA credit rating.

FY14-15E earnings reduced. We further reduced our FY14-15E earnings by 35%-33% to RM169.5-183.2m, respectively, as we further factored in a higher operating cost for KLIA2, given that our previous assumptions were overly optimistic as we upkeep our earnings model. However, we did not consolidate the accounts for SGIA to capture the remaining 40% stake at this juncture as the acquisition is yet to be completed.

Lowered TP, MARKET PERFORM maintained. Subsequent to our revision in earnings, we also reduced our Target Price which is based on Sum-of-Parts valuation by 7.4% from RM8.06 to RM7.46 (kindly refer overleaf for more details). However, we still maintain our MARKET PERFORM call on AIRPORT as we believe that most near term catalyst and risks had been well priced in at this juncture.

Source: Kenanga