AIRPORT announced that they have been granted an extension to operate all airports in Malaysia for another 35 years till 2069 (previously year 2034). We are positive on the extension, as this will reduce amortization rate of their intangible assets by c.25%, further improving earnings. Upgrade our FY17E earnings by 160% to RM261m. Post adjustment in earnings; we reiterate our OP call with a higher TP of RM7.47 (previously RM7.31).

News. Last Friday, AIRPORT announced that they have been granted approvals for a 35-year extension (on top of the existing 25 years) towards their Operating agreement (entered in Feb- 2009) between the GoM, which would allow AIRPORT to continue operating the existing airports in Malaysia until year 2069 (vs. 2034 previously).

Kick starts the year with great news! We are POSITIVE on the extension of agreement as this will greatly reduce the amortization rate of AIRPORT?s Malaysian intangible assets (the concession rights in Malaysia and its associated infrastructure and assets constructed by AIRPORT in exchange for the right to charge users) as the amortisation of assets will now be spread over a longer period of 60 years instead of the initial 25 years. We note that the amortization expense on intangible assets (comprising all Malaysian Airports and ISG airport assets) for 9M16 amounts to RM715m in which c.50% were derived from Malaysian operations.

Company Outlook. For FY17, we are maintaining our growth targets of 6.0% and 7.0% for Malaysian and Turkey operations, respectively, as we expect Malaysian passenger growth to remain strong from strong travel demand coupled with increased capacities from airlines, i.e. AIRASIA, Malindo while Turkey?s international passenger traffic is expected to remain subdued.

Major boost to FY17E earnings. Based on the existing carrying amount of AIRPORT?s intangible assets of RM17.0b (split almost equally between Malaysia and Turkey ops.), we forecast that the new extension in agreement will reduce AIRPORT?s FY17E depreciation and amortization cost by c.25% or RM226m after spreading its Malaysian ops.? intangible assets longer till 2069 (from 2034). Post adjustment, we upgrade our FY17E earnings by 160% to RM261m while keeping our FY16E earnings unchanged.

Maintain OUTPERFORM with a higher TP of RM7.47 (previously RM7.31) which is based on a 5-year +0.5SD FY17E PBV of 1.58x. We applied a +0.5SD towards valuations in view of the better earnings prospects from the new PSC structure recently implemented and the extension towards operating agreement. Note that our FY17E NDPS remains unchanged at 9.4 sen despite the upgrade in earnings as the change in amortisation time-line is a non-cash adjustment which has no impact towards AIRPORT?s cash flow.

Risks to our call include: (i) weaker than expected travel demand, (ii) increased travel threats in Turkey.

Source: Kenanga Research - 06 Feb 2017