Period  4Q14/FY14

Actual vs. Expectatio ns  Malaysia Airports Holdings (AIRPORT)’s registered core earnings of RM195m, that came above our and consensus expectation, it makes up 121% and 152% of our and consensus’ full-year estimates of RM161m and RM128m, respectively.

 The better than expected set of results was mainly due to the change in depreciation method in which management has adopted an Unit of Production Method (“UOP”) based on forecasted passenger during its concession period, as compared to the straight-line method used previously which resulted in a “savings” of RM101m in depreciation for the entire FY14, that was recognised in 4Q14.

 However, should there be no changes in depreciation method (straight-line), its FY14 core earnings would have came below ours and consensus expectations, registering core net earnings of only RM94m.

Dividends  No dividend was declared as expected.

Key Results Highlights  YoY, its FY14 core earnings decreased by -55% to RM195m, due to higher depreciation cost (+46%), staff costs (+9%), and its other operating expenses (+27%) i.e. utilities, maintenance, user fees and other costs arising due to the opening of KLIA2. That aside, its net financing cost also shot up substantially by +433% to RM151m. On its revenue front, it saw a double-digit decline of -18% mainly due to the lack of construction revenue recognition from KLIA2, as it was handed over back in May-14.

 QoQ, its 4Q14 EBITDA was down -16% to RM167m despite its revenue growth of +5% due to higher inventory costs (+29%), and other operating costs (+27%). The growth in revenue was supported by higher passenger movements and new landing charges coupled with higher contribution from its retail revenue. However, its core earnings saw a substantial increase from RM3.4m to RM100.3m in 4Q14, mainly driven by a huge decrease in depreciation costs (- 50%) due to the change in depreciation method used for its concession assets from straight-line basis to UOP based on forecasted passenger traffic numbers over its concession period.

Outlook  Moving forward, we remain cautious on AIRPORT’s outlook due to its high operating costs since the commencement of KLIA2, coupled with management’s conservative passenger traffic forecast of 85.8m pax for the entire 2015 due to subsequent air travel mishaps in 2014. However, management remains hopeful that there could be more room for further optimism given government’s efforts in promoting Malaysia Year of Festivals campaign in 2015.

Change to Forecasts  There are no changes to our FY15 earnings estimate, despite the change in depreciation method to UOP, as we also lowered our Malaysia passenger traffic forecast down by -4% to 86.7m pax for FY15, as we are turning cautious with the outlook in the aviation industry. At the same time, we are introducing our FY16 earnings estimates of RM213m.

Rating Maintain UNDERPERFORM

Valuation  Given the challenging outlook in the aviation industry and operating environment for AIRPORT which was bogged down by high operational costs since the inception of KLIA2, we are reiterate our UNDERPERFORM on AIRPORT with an unchanged TP of RM6.77 that is based on SOP.

Risks to Our Call  Significant drop in passenger numbers due to catastrophic events.

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

Source: Kenanga