Period  3Q14/9M14

Actual vs. Expectations Malaysia Airports Holdings (AIRPORT)’s registered core earnings of RM151.3m (excluding SGIA losses) for 9M14, making up 89% and 99% of our forecast and street estimates, respectively. While we may deem the results to be within expectations, as 4Q14 is seasonally a “weaker” quarter for AIRPORT, this stronger set of results could be owing to more conservative assumptions in operating costs i.e. factoring higher expenses for utilities, finance costs or user fees..

Dividends  No dividend was declared as expected.

Key Results Highlights YoY, AIRPORT’s 9M14 core earnings plummeted by 56% to RM151.3m from RM340.6m, previously. The drop in earnings was primarily driven by higher operating cost arising from the opening of KLIA2 whereby its employee benefits expenses had risen by 20% from RM393.9m to RM473.3m due to the increase in manpower and one-off salary increment and adjustments. That aside, its utilities cost also shot up tremendously by 40.5% to RM221.6m driven by a higher consumption on the commencement of KLIA2 coupled with the impact from tariff hike. Its user fee expenses also saw an increase of 16% as a result of the full recognition of 100% user fee on its income statement as compared to 50% previously.

 QoQ, its 3Q14 revenue fall by 43% to RM675.8m mainly due to the absence of construction revenue as the construction of KLIA2 was fully recognised back in 2Q14. However, should we exclude the construction revenue in 2Q14 for comparison purposes, its 3Q14 revenue grew by 6.5% instead, underpinned by the improvements in aeronautical revenue due to lower airline incentives while its non-aeronautical segment was driven by higher rental revenue. However, its 3Q14 core earnings dropped by 70% to RM4.4m primarily due to 48% increase in financing costs of RM54.5m arising from KLIA2.

Outlook  In the near term, we expect AIRPORT to continue to pursue its operating agreement (OA) extension and hopeful of concluding the OA with the government by year-end, and should they be able to extend its OA it could lower its depreciation cost from KLIA2 by RM24.0m annually.

 As for the acquisition of the remaining stake in Sabiha Gocken International Airport (SGIA), we expect the deal to be concluded by the end of 1H15.

Change to Forecasts No change to our FY14-15E estimates.

Rating Maintain MARKET PERFORM

Valuation  We reiterate our MARKET PERFORM call on AIRPORT with an unchanged SoP driven Target Price of RM7.46, due to the lack of fresh catalyst while its earnings risk had been well priced in.

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