AIRPORT’s 9M17 total passenger registered growth of 8.6% YoY, in line with our 9.2% forecast. We maintain our Malaysia passenger growth forecast of 10.0% and Turkey growth forecast of 7.0%. No change to our FY17-18E earnings estimates. Maintain MP with an unchanged TP of RM8.38.

9M17 passenger growth within expectations. 9M17 passengers (including ISG) registered growth of 8.6% YoY-YTD which is in line with our total MAHB growth forecast of 9.2% (+10.0% for Malaysian operations, +7.0% for Turkey operations).

Malaysian operations review. For September, AIRPORT’s passenger in Malaysia increased 3.6% YoY. International passengers were up 10.7% while domestic passengers contracted by 2.9% YoY. We believe the overall increase in international traffic was due to visa relaxation for India and China, competitive fares as well as the favourable exchange rate for foreign tourists. Meanwhile domestic demand was weaker due to some flight cancellations and possibly capacity cuts from Malaysia Airlines and other local carriers as they rationalised their capacity allocations. Average load factors were down 3.1ppt YoY to 73.1%.

KLIA traffic review. In September, KLIA Main registered negative growth of 3.4% YoY with international passenger registering a positive growth of 6.4% while domestic traffic contracted 29.7%. International growth was supported by increased seat capacities by airlines and stronger travel demand while domestic contraction was due to reduction in capacity by Malaysia Airlines, Firefly and Malindo Air as explained above. Meanwhile, KLIA 2 positive traffic growth continued, at 15.0% YoY (International: 15.3%; Domestic: 14.3%), which we believe is attributable to strong growth from AIRASIA and AAX as they increase their capacity through higher utilisation of planes.

Healthy growth at Turkey in Sept. ISG Airport’s passenger growth for September registered the seventh consecutive YoY growth in FY17 at a healthy +7.9% (international +9.5%, domestic +7.0%). We see encouraging growth registered for 9M17 in Turkey (+4.0% YoY-YTD) given that it had previously registered negative YoY growth since the negative streak of events, which shook Turkey since early FY16. Hence, we maintain our +7.0% forecast and look for a stronger 4Q, especially with the international side to drive passenger traffic closer to our target.

Unchanged earnings. We make no changes to our FY17-18E earnings forecasts as our underlying assumptions for FY17 passenger growth forecasts remain unchanged at 10.0% for Malaysia and 7.0% for Turkey.

Maintain MP with an unchanged TP of RM8.38. Post traffic review, we maintain our MP call and TP of RM8.38, which is based on FY18E Fwd. PBV of 1.74x (+1.5SD). We believe our applied +1.5SD is fair given the better earnings prospects from the new PSC structure implemented since the beginning of FY17 and the operating agreement extension.

We believe rerating catalysts lies with: (i) stronger-than-expected recovery in Turkey, and (ii) higher-than-expected passenger growth in Malaysian operations.

Source: Kenanga Research - 11 Oct 2017