AIRPORT registered 7M18 passengers growth of 5.1% YoY- YTD, which we deem in line with our 8.5% forecast as we expect stronger growth in the months ahead. No change to our FY18-19E CNP. Due to share price’s run-up, downgrade to UP (from MP) with an unchanged TP of RM8.60 based on 1.72x FY18E PBV.

7M18 traffic picking up. AIRPORT’s 7M18 passengers (including ISG) registered growth of 5.1% (+3.0% for Malaysian operations and +12.0% for Turkey operations) YoY-YTD which we deem in line with our total growth forecast of 8.5% (+8.0% for Malaysian operations, +10.0% for Turkey operations) as we see growth remaining healthy for the months ahead thanks to strong demand from international travel.

Malaysian operations review. For July, passengers in Malaysia grew 2.2% YoY (international: +5.1%; domestic: -1.0%). The growth seems subdued due to a higher base effect as last year Hari Raya festive season was stretched out a few weeks into July 2017.

KLIA and KLIA2 traffic. In July, KLIA Main only grew 1.4% YoY despite registering a decent growth of 5.1% for its international traffic as it was dragged down by domestic traffic, which declined by 12.2%. KLIA 2’s positive traffic growth continued, at 4.3% YoY (international: 2.0%; domestic: 9.2%), attributable to growth from AIRASIA as they increased their capacities through higher plane utilisation as well as the number of planes.

Turkey operations. ISG Airport’s passenger growth for July 2018 grew 9.9% (international +14.7%, domestic +7.4%) YoY, as international traffic demand remains strong potentially due to tourism growth arising from weaker Turkish Lira. Its 7M18 passenger traffic continued to grow at an encouraging pace of 12.0%

Outlook. We are anticipating more news flow in the aviation industry, especially from MAVCOM on the implementation of QoS (Quality of Service) framework in 3Q18 for airports (starting with KLIA1 and 2) with objectives to achieve higher quality of service for passengers and development of new airports in the region. This 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.

Downgrade to UNDERPERFORM (from MARKET PERFORM) with an unchanged TP of RM8.60 given the share price’s run-up. Our TP is based on PBV of 1.72x PBV which is 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 while also noting that the lack of fresh catalyst in the near-to-medium-term.

Risks to our call include: (i) higher-than-expected passenger growth, and (ii) sharp rise in EUR against MYR.

Source: Kenanga Research - 13 Aug 2018