AIRPORT’s FY17 total passenger registered growth of 7.8% YoY-YTD, in line with our 9.2% forecast with total passengers coming in at 127.9m – accounting for 99% of our 129.4m target. No change to our FY17-18E earnings. Downgrade to UP with an unchanged TP of RM8.38 given the recent run-up in share price.

FY17 within expectations. FY17 passengers (including ISG) registered growth of 7.8% (8.5% for Malaysian operations, +5.6% for Turkey operations) YoY-YTD which we deem in line with our total MAHB growth forecast of 9.2% (+10.0% for Malaysian operations, +7.0% for Turkey operations). While the growth of 7.8% seems slightly lower than our targeted growth forecast of 9.2%, we note that in terms of total passenger count, it is minimal where total AIRPORT passengers count was at 127.9m vs. our target of 129.4m (accounting for 99%).

Malaysian ops review. For December, passenger in Malaysia increased 1.1% YoY. International passengers were up 10.0% while domestic decreased 7.5% YoY. We believe the overall increase in international traffic was due to visa relaxation for India and China. Meanwhile, the decrease in domestic demand were due to capacity cuts from Malaysia Airlines and Malindo as they rationalised their capacity allocations which were partially masked by increased capacity by AIRASIA.

KLIA traffic. In December, KLIA Main registered negative growth of 2.4% YoY with international passenger registering positive growth of 11.7% while domestic traffic contracted 34.4%. KLIA Main International growth was supported by increased seat capacities by airlines (such as Malindo Air, Xiamen Airlines, Hong Kong Dragon Airlines, Saudi Arabian Airlines and Emirates) and stronger travel demand while the domestic contraction was due to reduction in capacity by Malaysia Airlines, Firefly and Malindo Air as explained. KLIA 2’s positive traffic growth continued, at 11.8% YoY (Int: 9.2%; Dom: 17.4%), which we believe is attributable to strong growth from AIRASIA and AAX as they increased their capacity through higher plane utilisation. We are targeting a milder Malaysian growth of 8% for FY18 (vs. 10% in FY17) due to: (i) lower seat capacities by key airlines (Malindo, MAB), and (ii) weaker currency advantage from stronger MYR.

Strongest growth in Turkey. ISG Airport’s passenger growth for December registered its 10th consecutive YoY growth in FY17 at an all year high of +16.2% (international +18.6%, domestic +15.1%). YoY- YTD, Turkey performed well registering +5.6% (vs FY14’s 4.8%). We are positive on the recovery of Turkey from the negative streak of events which shook Turkey since early FY16, and we are targeting a double-digit growth target of 10% for their Turkey operations in FY18.

Unchanged earnings. No change to our FY17-18E earnings. Our FY18E earnings are based on passenger growth target of 8.4% (Malaysia +8%; Turkey +10%).

Valuations. Post review, we downgrade AIRPORT to UP (from MP) with an unchanged TP of RM8.38 given that its share price had run up recently and we do not see any near-term catalyst. We note that our TP is based on FY18E Fwd. PBV of 1.74x (+1.5SD) which we believe our applied +1.5SD is fair given the better earnings prospects from the new PSC structure implemented since the early FY17 and the operating agreement extension. We highlight that we are not using a +2SD for AIRPORT as we see softer growth from Malaysia operations especially within its domestic space. Furthermore, we note that the only time AIRPORT has ever traded to its +2SD was in Dec 2013 when it rallied in anticipation of their 40% proposed acquisitions of ISG and LGM. That said, its share price retraced sharply post the announcement.

Source: Kenanga Research - 11 Jan 2018