Jan 2018 total passenger registered growth of 6.5% YoY vs. our 8.5% forecast which we deem broadly in line due to seasonality, i.e. CNY held in Jan in FY17 while CNY is in Feb for FY18. No change to our FY17-18E earnings. No change to our FY17E/FY18E CNP. Maintain UP with an unchanged TP of RM8.55 based on 1.74x FY18E PBV.

January traffic broadly in line. Jan 2018 passengers (including ISG) registered growth of 6.5% (+1.4% for Malaysian operations, +25.2% for Turkey operations) YoY-YTD which we deem as in line with our total MAHB growth forecast of 8.5% (+8.0% for Malaysian operations, +10.0% for Turkey operations) due to seasonality factors, i.e. Chinese New Year in FY17 was on 28th Jan while Chinese New Year in FY18 will be held on 15th Feb.

Malaysian ops review. For January, passenger in Malaysia increased 1.4% YoY. International passengers were up 8.9% while domestic decreased 6.4% YoY. We believe the overall increase in international traffic was due to participation of new airlines (Tiger Airways, Batik Air) and introduction of new routes by existing airlines. Meanwhile, the decrease in domestic demand was due to seasonality, i.e. CNY as mentioned above, along with reduction in capacity from Malaysia Airlines and Malindo as they rationalised their capacity allocations.

KLIA traffic. In January, KLIA Main registered negative growth of 2.8% YoY with international passenger registering positive growth of 6.1% while domestic traffic contracted 31.0%. KLIA Main International growth was supported by increased seat capacities of airlines 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 12.0% YoY (International: 10.2%; Domestic: 16.1%), which we believe is attributable to strong growth from AIRASIA and AAX as they increased their capacity through higher plane utilisation.

Turkey operations. ISG Airport’s passenger growth for January registered superb YoY growth of 25.2% (international +21.6%, domestic +27.0%) as they recover from the negative streak of events which shook Turkey in early FY16. We expect the positive trend to continue ahead.

Outlook. For FY18, we are targeting a softer Malaysian passenger growth of 8% (vs. 10% in FY17) due to: (i) lower seat capacities by key airlines (Malindo, MAB), and (ii) weaker currency advantage from stronger MYR. We are optimistic on the recovery of Turkey and targeting a growth of 10% for FY18. Meanwhile, the anticipated QoS (Quality of Service) framework to be implemented by MAVCOM from 3Q18 for airports (starting with KLIA1 and 2) with objectives to achieve higher quality of service for passengers would have downside risks towards AIRPORT’s earnings given that MAVCOM have proposed a financial penalty of up to 5% of aeronautical revenue, which would dent our FY18E CNP by 5.7% for every 1% penalty (against Malaysia aeronautical revenue).

Earnings unchanged. Post review, we maintain FY17-18E earnings.

Maintaining UP. We maintain our UP call with unchanged TP of RM8.55 based on an unchanged FY18E PBV of 1.74x (+1.5SD @ 5 years). We believe our applied +1.5SD valuation is fair given the better earnings prospects from the new PSC structure implemented since early FY17 and the Malaysia concession extension obtained. That said, we highlight that we are not using a +2SD valuation as we see softer growth from Malaysian operations, especially within its domestic space coupled with earnings risks from the yet to be implemented QoS by MAVCOM.

Source: Kenanga Research - 13 Feb 2018