We attended Malaysia Airports Holdings Bhd’s (AIRPORT) briefing yesterday, came away feeling positive as we got more assurance and clarity on their recent performance from management, which further prompt us to raise our FY16-17E core earnings by 19.7x-0.6x to RM61.3m-RM153.7m after adjusting our financing costs lower by 9%. That said, we also upgraded AIRPORT to MARKET PERFORM with a higher Target Price of RM7.11 based on 1.52x PBV, which is its 5-year Fwd. Avg. level premised on better improving earnings visibility and growth direction of the company.

An unexceptional year. In the past year, AIRPORT had been going through a series of accounting changes and also adjustments in fair value due to the acquisition of Sabiha Gocken International Airport (SGIA), which could have caused much confusion in the market. However, management promised that was an extraordinary year and they are not expecting any more changes on their accounting policies or huge changes in fair value adjustment for 2016. We view this positively as a consistent reporting standard would provide better clarity to its financial performances in the future.

Expecting more growth. As of 1Q16, its overall passenger traffic of 27.8m grew by 6.9%, with its Malaysian and Turkey operations registering growth of 3.4% and 19.6%, respectively. While it’s 1Q16 overall passenger traffic growth was inline with our growth expectations of 3.0% and 20.0% for its Malaysian and Turkey operations, it is slightly ahead of management’s growth target of 2.5% and 10.8%, respectively. Given the strong passenger growth in 1Q16, we believe our growth targets are highly achievable while easily surpassing management’s conservative targets, especially for SGIA.

Runway to Success 2020, stay tuned. Recently, AIRPORT officiated their 5- year growth plan namely Runway to Success 2020 (RTS2020) which targets to achieve 40% growth in passenger traffic and 90% growth in both revenue and EBITDA by 2020. While they have identified four core focus in growing their business, i.e. (i) turning Kuala Lumpur into a hub, (ii) improving total airport experience, (iii) development of Aeropolis, and (iv) expanding internationally, not much details been shared in achieving its tall revenue target of RM7.5b by 2020 as they would need to achieve a 5-year CAGR of 14.1%. However, we remained excited with RTS2020, as management had promised to shed further details by June-July as they are still in the midst in finalising the details. That said, management also indicated that they hope to resolve the LAD claims issue with its KLIA2 contractors, namely Bina Puri, by June.

An Upgrade! Post-briefing, we raised our FY16-17E Core Net Profit from RM3.0m-RM93.4m to RM61.3m-RM153.7m as we adjusted our financing costs lower by 9% for both years as we obtained better clarity from management on its financing costs. Following the upward revision in earnings, we are also upgrading AIRPORT to MARKET PERFORM with a higher Target Price of RM7.11, based on 1.52x FY17E PBV (5-year Fwd. Avg.). Previously, we had an UNDERPERFORM call on AIRPORT with a lower Target Price of RM5.24 which was based on SoP and implied 1.12x PBV at 5-year Fwd. -2SD level. We believe AIRPORT warrants an upgrade premised on: (i) improved earnings visibility, (ii) an interesting 5-year growth plan which management are committed to achieve and lastly (iii) potential stronger-than-expected passenger traffic growth vis-à-vis our assumptions of 3.0%-20.0% for its Malaysia and Turkey operations, respectively. 

Source: Kenanga Research - 29 Ape 2016