AIRPORT registered 4M18 passenger growth of 6.0% YoY- YTD which we deem in line with our 8.5% forecast. No change to our FY18-19E CNP. Maintain MP with an unchanged TP of RM8.45 based on 1.72x FY18E PBV.

4M18 traffic in line. AIRPORT’s passengers (including ISG) in 4M18 registered growth of 6.0% (+2.9% for Malaysian operations and +16.7% for Turkey operations) YoY-YTD which we deem as in line with our total growth forecast of 8.5% (+8.0% for Malaysian operations, +10.0% for Turkey operations). We expect higher domestic passenger traffic for Malaysia backed by: (i) the recent general elections which will be reflected in May traffic numbers, and (ii) the increased domestic routes by AirAsia on the back of an expanded fleet of planes.

Malaysian ops review. For April, passenger in Malaysia increased 0.6% YoY. International passengers were up 5.0% while domestic ones decreased 3.9% YoY. We believe the overall increase in international traffic was due to participation of new airlines (Tiger Airways) and introduction of new routes by existing airlines. Meanwhile, the decline in domestic demand was due to reduced capacity from Malaysia Airlines and Malindo as they rationalised their capacity allocations.

KLIA traffic. In April, KLIA Main registered negative growth of 2.3% YoY with international passenger registering a positive growth of 2.4% while domestic traffic contracted 18.3%. 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 local airlines, i.e. Malaysia Airlines, Firefly and Malindo Air as explained above. KLIA 2’s positive traffic growth continued, at 6.7% YoY (international: 4.6%; domestic: 11.2%), which we believe was attributable to growth from AIRASIA and AAX as they increased their capacities through higher plane utilisation as well as number of planes.

Turkey operations. ISG Airport’s passenger growth for April registered strong YoY growth of 12.3% (international +12.3%, domestic +12.2%) as they recovered from the negative streak of events, which shook Turkey in early FY16. We expect the positive trend to continue.

Outlook. 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 could pose as downside risks for AIRPORT’s earnings given that MAVCOM has proposed a financial penalty of up to 5% of aeronautical revenue, which could 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 FY18-19 to upgrade their infrastructure, i.e. trains, baggage systems and toilets.

Earnings unchanged. Post review, we maintain FY18-19E earnings.

Maintain MARKET PERFORM with an unchanged TP of RM8.45. Our TP is based on PBV of 1.72x PBV which is pegged at +0.5SD to its 2-year average. We believe our applied +0.5SD level is reasonable given: (i) the positive 2-year concession extensions at ISG along with the recovery of passenger traffic, and (ii) PSC equalization at KLIA 2 from FY18 premised on better earnings prospects from AIRASIA’s strong expansion. Risks to our call include: (i) lower-than-expected passenger growth, and (ii) epidemic/terror attacks.

Source: Kenanga Research - 15 May 2018