AIRPORT’s 10M17 total passenger registered growth of 8.3% YoY-YTD, 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.

10M17 passenger growth within expectations. 10M17 passengers (including ISG) registered growth of 8.3% YoY-YTD which is in line with our total MAHB growth forecast of 9.2% (+10.0% for Malaysian operations, +7.0% for Turkey's operations).

Malaysian operations review. For October, AIRPORT’s passenger in Malaysia increased 7.0% YoY. International and domestic passengers were up 13.1% and 1.3% YoY, respectively. 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 buoyed by AIRASIA increasing capacity despite capacity cuts from Malaysia Airlines, Firefly and Malindo as they rationalised their capacity allocations. Average load factors were up 7.0ppt YoY to 74.1%.

KLIA traffic review. In October, KLIA Main registered negative growth of 0.6% YoY with international passenger registering a positive growth of 6.4% while domestic traffic contracted 23.9%. International growth was supported by increased seat capacities by airlines and stronger travel demand while the 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 18.3% YoY (International: 17.0%; Domestic: 20.9%), which we believe is attributable to strong growth from AIRASIA and AAX as they increased their capacity through higher utilisation of planes.

Convincing growth at Turkey. ISG Airport’s passenger growth for October registered the 8th consecutive YoY growth in FY17 at a healthy +6.6% (international +10.3%, domestic +4.9%). We see encouraging growth registered for 10M17 in Turkey (+4.3% 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 4Q17, 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 - 13 Nov 2017