FY17 CNP of RM180m came in below our/consensus estimates, making up 73%/68% of forecasts. Negative deviation stemmed from higher-than-expected depreciation and amortization at Turkey. An 8.0 sen dividend declared; bringing FY17 dividend to 13.0 sen above our 11.0 sen forecast. Cut FY18E earnings by 21% and introduced FY19E. Lower TP to RM8.45 (from RM8.55) based on lower 1.72x PBV (from 1.74x) but upgrade call to MP.

Below estimates. FY17 CNP of RM180m came in below our/consensus estimates accounting for 73%/68% of forecasts due to higher-than-expected depreciation and amortization at Turkey. We highlight that our EBITDA forecast of RM1845m is in line accounting for 96.5% of FY17 EBITDA of RM1911m. An 8.0 sen dividend declared brought FY17 dividends to 13.0 sen, above our 11.0 sen forecast.

Highlights. FY17 CNP of RM180m improved 1054% YoY-YTD due to revenue increase (+11%) from better passenger traffic and lower effective tax rate (-31ppt). 4Q17 CNP of RM13.4m deteriorated 80% QoQ mainly due to: (i) higher staff cost (+21%) as AIRPORT had provisioned an additional c.RM40m for performance bonuses in 4Q17, (ii) weaker contributions from ISG as passenger traffic QoQ was down 12.8% from seasonality, and (iii) higher effective tax rate (+34ppt).

Key updates. In the results conference call, AIRPORT noted that they have obtained a 2-year concession extension at ISG till Aug 2032 (from 2030) as they have successfully fulfilled certain CAPEX upgrade requirements in ISG. Positive on the development as AIRPORT would be able to further benefit from the high passenger growth rate Turkey is currently experiencing. Furthermore, management highlighted that there could be a possibility that they would secure another 2-year extension at ISG if further CAPEX upgrade requirements are met.

Outlook. For FY18, we are targeting a softer Malaysian passenger growth of 8% (vs. 8.5% in FY17) due to: (i) lower domestic seat capacities by 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 pose downside risks towards AIRPORT’s earnings given that MAVCOM has proposed a financial penalty of up to 5% of aeronautical revenue, which would dent our FY18E CNP by 7% for every 1% penalty. That said, in order to mitigate penalties, AIRPORT has increased their planned CAPEX to RM600-700m (from typically RM300m) in FY18-19E to upgrade their infrastructure, i.e. trains, baggage systems and toilets.

Earnings. Cut our FY18E earnings by 21% after increasing our depreciation expense assumption in Turkey from RM468m to RM528m while taking into consideration the newly extended concession by 2 years. We also introduce our FY19E earnings forecast of RM322m.

Upgrade to MARKET PERFORM but with a lower TP of RM8.45 (from RM8.55). Our TP is based on slightly lower PBV of 1.72x PBV which is pegged at +0.5SD to its 2-year average (refer overleaf). We believe our applied +0.5SD level is reasonable given: (i) the positive concession extensions at ISG along with the recovery of passenger traffic, and (ii) PSC equalization at KLIA2 from FY18 premised on better earnings prospects from AIRASIA’s strong expansion. In light of the recent retracement of share price, we upgrade our call to MP (from UP).

Risks to our call include: (i) lower-than-expected passenger growth, and (ii) unexpected epidemic/terror attacks.

Source: Kenanga Research - 22 Feb 2018