News  Yesterday, Malaysia Airports (AIRPORT) made an announcement that they are proposing a rights issuance on the basis of one (1) Rights share for every five (5) existing AIRPORT shares for the acquisition of 40% collective equity stake in İstanbul Sabiha Gökçen Uluslararasi Havalimani Yatirim Yapim Ve İşletme A.Ş. (ISG) and LGM Havalimani İşletmeleri Ticaret Ve Turizm A.Ş. (LGM). Based on an illustrative rights issue price of RM4.80, it would represent approximately 28.4% discount to its TEAP price of RM6.70.

Comments  The proposed rights issuance by AIRPORT to fund the acquisition of the remaining 40% stake in ISG and LGM amounting to EUR285.0m was one of the funding options that were widely anticipated by the market. However, it was not as our desired option (i.e. funding through perpetual sukuk) in which we have highlighted in our previous report dated back 27-October-14.

 The rights issuance would allow AIRPORT to maintain its AAA credit rating without breaching its debt covenant of a gearing of 1.25x. Post-acquisition of the remaining 40% of Sabiha Gocken International Airport (SGIA) with the proposed rights issuance which would raise up to RM1.3b, we expect its gearing ratio to go up closer to 0.9x after assuming all the debts from SGIA.

 However, post the proposed right issuance, we should see its FY15EPER increase from 50.3x to 57.1x after factoring in the contribution from SGIA as the additional earnings to FY15E from the remaining 40% stake is not enough to negate the dilution impact from the rights issuance based on FY15E.

Outlook  In the near term, we expect AIRPORT to continue pursuing its operating agreement (OA) extension which it is targeting to conclude by year-end, and should they be able to extend the OA, this could lower its depreciation cost from KLIA2.

 As for the acquisition of the remaining stake in SGIA, we expect the deal to be concluded by the end of 1H15 post rights issuance.

Forecast  No changes to our FY14 forecasts. However, we have fine-tuned our FY15 earnings estimate higher by 6% from RM183.2m to RM193.5m as we factor in SGIA’s contributions.

Rating Downgrade to UNDERPERFORM

Valuation  Following the announcement of the proposed rights issuance, we adjusted our SoP driven TP lower by 9% from RM7.46 to RM6.77 after factoring in the increased share base arising from the rights issuance and also 100% contribution from SGIA. (Kindly refer overleaf for more details). Following our reduction in TP, we downgrade AIRPORT to UNDERPERFORM (from

MARKET PERFORM previously) as the rights issuance is not earnings accretive in the near term.

Risks 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