AIRPORT registered 8M18 passengers growth of 4.8% YoY- YTD, which we deem in line with our 8.5% forecast as we are banking on stronger growth in the months ahead. No change to our FY18-19E CNP. Maintain UP with unchanged TP of RM8.60 on 1.72x PBV.

8M18 traffic. AIRPORT’s 8M18 passengers (including ISG) registered growth of 4.8% (+2.7% for Malaysian operations and +11.5% for Turkey operations) YoY-YTD. While the growth seems to be lagging behind our full-year growth assumptions of 8.5% (+8.0% for Malaysian operations, +10.0% for Turkey operations) due to weaker growth from its Malaysian operations, we deem that it is still on track to meet our target, banking on stronger months ahead especially from international travel.

Malaysian operations review. For Aug-2018, passengers in Malaysia grew at a slower pace of 0.9% YoY (international: +1.0%; domestic: - 0.8%). The growth seems subdued due to a higher base effect from SEA Games in Kuala Lumpur, coupled with school holidays in Aug- 2017.

KLIA and KLIA2 traffic. As of Aug-2018, KLIA Main only grew 0.1% YoY despite registering a decent growth of 1.6% for its international traffic as it was dragged down by domestic traffic, which declined by 5.8%. KLIA2 registered negative traffic growth of 0.6% YoY (international: -3.7%; domestic: +5.7%), dragged down by international travel, we believe it is also attributable to higher base effect.

Turkey operations. ISG Airport’s passenger growth for Aug-2018 grew 8.5% (international +12.0%, domestic +6.6%) YoY, as international traffic demand remains strong potentially due to tourism growth arising from weaker Turkish Lira coupled with summer holidays in Turkey. Its 8M18 passenger traffic continued to grow at an encouraging pace of 11.5%.

Outlook. In the near term, we believe that that management is working relentlessly to meet MAVCOM’s QoS (Quality of Service) framework, which is to be rolled out in stages. To recap, management have planned CAPEX of RM600-700m over 2-3 years to upgrade their infrastructure to meet or exceed QoS requirement. That said, we are also anticipating the study on new PSC charges from MAVCOM that could be favourable or detrimental to AIRPORT’s prospects.

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

Maintain UP with unchanged TP of RM8.60. Our TP is based on an 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 operations on the back of ISG’s terminal capacity expansion by 2H18. While we believe that there is great potential in AIRPORT, we do not see any near-term catalyst, pending clarity and direction from MAVCOM on the on-going developments i.e. new PSC charges, and RAB model, which could potentially prompt us to upgrade our valuation and recommendation.

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

Source: Kenanga Research - 13 Sep 2018