9M18 CNP of RM347.6m came in above our, but within street's expectations, at 86% and 76% of full-year estimates, respectively. The positive variance arises from lower-than- expected operating cost, depreciation and tax. No dividend declared, as expected. Raised FY18-19E earning by 13-8%. Upgrade to OP with a higher TP of RM8.95 on PBV of 1.72x (previously, MP; TP: RM8.60).

Above our expectation, but inline with consensus. 9M18 CNP of RM347.6m came in above our expectation, but within that of consensus, at 86% and 76% of full-year estimates, respectively. While their 10M18 passenger traffic growth of 4.1% fell short of our targeted growth of 8.5%, their 9M18 performance still beats our expectations due to our higher cost assumptions, i.e. operating cost, depreciation and tax. No dividend declared, as expected. Note that we derived our CNP of RM215.6m after excluding the gains in disposal of GMR Male (RM28.2m), GMR Hyderabad (RM258.4m) and a tax reversal (RM22.0m).

Result highlights. 9M18 CNP of RM347.6m improved 110%, YoY backed by revenue growth (+6%) coupled with improvements in operating margin (+5ppt). The revenue growth was driven by higher mix of international traffic coupled with lower total cost for Malaysia operations (refer overleaf for details) which came down by 1% mainly from the cost reduction in direct material, direct labour, direct overheads and staff cost, which subsequently improved its operating margin. QoQ, 3Q18 CNP improved 84% attributable to several factors, i.e. (i) better revenue (+6%) thanks to the improvement in aeronautical revenue (+14%), and (ii) better operating margin of 28% (+2ppt).

Outlook. While AIRPORT’s performance is commendable, the recent announcement of a proposed REIT for airport by the government has added more uncertainty to the sector, especially when AIRPORT is currently working closely with MAVCOM on the implementation of RAB. Nonetheless, we remain hopeful that AIRPORT would be able to conclude their negotiation on its operating agreement with the government by 1Q19. That aside, management also indicated that they are still active in discussion with interested parties on their potential stake disposal in their Turkey venture.

Earnings upgrade. Post results, we raised our FY18-19E core earnings higher by 13-8% after reducing our cost assumptions while lowering total passenger traffic growth to 4.7% (previously, 8.5%).

Upgrade to OP with higher TP of RM8.95 post revision in earnings. Coupled with the recent sell-down in share due to uncertainties in the sector, this provides a good opportunity to buy on weakness (previously, MP; TP: RM8.60). Our TP of RM8.95 is based on the 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 in Turkey on the back of ISG’s terminal capacity expansion by 2H18.

Risks to our call include: (i) lower-than-expected passenger growth, (ii) sharp swing in forex MYR/EUR, and (iii) the unclear structure of the proposed airport REIT which could affect AIRPORT’s development direction.

Source: Kenanga Research - 22 Nov 2018