AIRPORT’s Malaysia’s passenger traffic of 3.3% YoY-YTD came in above our 3.0% target while Turkey’s passenger growth of 6.8% YoY-YTD was below our 10.0% target. Total August passenger numbers (including ISG) registered growth of 2.0% YoY due to improved average load factor (+2.8ppt) for Malaysian operations. No changes to our FY16-17E core earnings as we are anticipating a stronger 4Q performance for ISG as the impact from earlier negative news on Turkey subsides coupled with a seasonally stronger quarter. Maintain MARKET PERFORM with unchanged TP of RM6.43.

YTD passenger traffic growth. Total passenger growth for Malaysian airports and ISG (Turkey) was up 3.3% and 6.8% YoY-YTD, respectively. While Malaysia’s passenger growth came in above our 3.0% target, ISG was below our 10.0% target. Meanwhile, total AIRPORT’s August passenger numbers (including ISG) registered growth of 2.0% YoY mainly due to improved average load factor (+2.8ppt) and 26 carriers showing double-digit growth for AIRPORT’s Malaysian operations.

Malaysian passenger traffic review. In August, AIRPORT’s passengers in Malaysia increased 5.0% YoY. International and domestic passengers were up 5.2% and 4.9%, respectively. The overall increase was mainly due to: (i) improved average load factor of 74.8% (+2.8ppt), (ii) 26 airlines recording double-digit YoY growth (+12% to +90%), and (iii) eight new foreign airlines operating in Aug 2016 (against Aug 2015).

Strong growth continued at KLIA Main. For August, KLIA Main registered strong growth of 25.3% YoY with international and domestic passengers registering positive growth of 14.5% and 71.9%, respectively. We believe the strong growth is supported by Malaysia Airlines Bhd (MAB) regaining market share in the domestic and international front coupled with Malindo and Lion Air shifting operations from KLIA 2 to KLIA Main since 15th March 2016. YoY-YTD, KLIA Main showed improved growth of 3.4% (against previous months’ growth of -12.9% to +0.3%). Meanwhile, KLIA 2 continued showing negative growth of 7.4% YoY (International: -3.5%; Domestic: -14.4%) due to passenger traffic moderating from Malindo and Lion Air shifting operations as explained above.

Turkey operations remain weak. ISG Airport’s passenger growth for August was down 5.0% YoY due to the travel warnings issued by various countries post bombing in Ataturk (Turkey), a failed military coup and the declaration of state of emergency in Turkey. As such, its international and domestic traffic recorded negative growth of 8.7% and 3.0%, respectively.

Maintain MARKET PERFORM. While there is downside bias towards our 10% ISG growth target, we make no changes to our passenger growth assumption for ISG as we are banking on a stronger 4Q performance given that it is a seasonally strong quarter and we are also banking on a recovery in passenger traffic as the earlier negative news flow on Turkey begins to fade. Hence, we maintain MARKET PERFORM on AIRPORT with an unchanged TP of RM6.43 based on a 5-year -0.5SD FY17E PBV of 1.39x. We believe rerating catalyst lies with: (i) extension of operating agreement, (ii) stronger traffic from the international front, and (iii) fasterthan- expected recovery from Turkey operations.

Source: Kenanga Research - 14 Sep 2016