1Q18 recorded a stellar set of results, which was above our/consensus estimates due to higher-than-expected Malaysian retail sales coupled with lower-than-expected operating costs, i.e. staff, maintenance and utilities. Upgrade FY18/19E earnings by 61%/49% post earnings. Maintain MP with higher TP of RM8.60 on PBV of 1.72x.

Strongly above. 1Q18 CNP of RM144m was above ours/consensus forecasts accounting for 57%/37% of estimates, respectively. The positive variance lies with higher-than-expected revenue from retail sales and lower-than-expected Malaysian operating costs, i.e. utilities, maintenance and staff costs. No dividends declared as expected. We derive our CNP of RM144m after reversing out the gains in disposal of GMR Male (RM28.2m) and GMR Hyderabad (RM258.4m).

Result highlights. 1Q18 CNP of RM144m improved 10x QoQ mainly due to: (i) lower staff costs (-25%) and (ii) lower direct material, labour and overhead costs (-17%) relating to Eraman. The staff cost was lower as AIRPORT had provisioned for an additional month of bonus amounting to c.RM40m. 1Q18 CNP increased 195% YoY on the back of increased revenue (+11%) attributed to better international passenger traffic from Malaysia (+11%) and Turkey (+18%).

Key takeaways during the conference call include: (i) ISG’s boarding hall extension to increase its terminal capacity from 33m to 41m capacity by 2H18, and (ii) no concrete developments over stake sale of ISG as AIRPORT is still looking out for a strategic stake partner which could value-add to their Turkey business, i.e. extension of concession.

Pending risks. 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 FY18E CNP by 4% for every 1% penalty. That said, in order to mitigate penalties, AIRPORT has increased planned CAPEX to RM600-700m (from RM300m) for FY18/19E to upgrade their infrastructure, i.e. trains, systems and toilets.

On a separate note, the new Ministry of Transport (MoT) has ordered MAVCOM to review the present PSCs in an effort to introduce a new rate by FY19. According to the MoT, ‘PSC charges have to be in accordance to the airports quality of facilities’. Based on our judgement of this statement, we potentially see lower PSC charges at other international airports aside KLIA Main (i.e. KLIA2, Penang, Langkawi, KK, Kuching) instead of the flat rate of RM73/pax (for non- Asean international flights) set out this year. Should it pan out as what we think, it would be less favourable for AIRPORT as revenue collections will be lower than initially expected. That said, we remain neutral for now pending AIRPORT’s final discussion with MAVCOM and greater details on this matter by June/July-18.

Earnings upgrade. Post stellar results, we upgrade FY18/19E earnings by 61%/49% after: (i) lowering Malaysian operating costs, and (ii) increasing retail sales assumptions at Eraman.

Maintain MP with a higher TP of RM8.60 (from RM8.45) post adjustment in earnings. Our TP is based on unchanged PBV of 1.72x PBV pegged at +0.5SD to its 2-year average. We think our applied +0.5SD level is reasonable given the recovery of passenger traffic at Turkey on the back of ISG’s terminal capacity expansion by 2H18. Risks to our call include: (i) lower-than-expected passenger growth, and (ii) unexpected epidemic/terror attacks.

Source: Kenanga Research - 30 May 2018