FY18 CNP of RM361.2m came in below expectations, making up 80%/78% of our/consensus estimates. A 9.0 sen dividend was declared, bringing the full-year dividends to 14.0 sen, in-line with our expectations. Lowered FY19E CNP by 32%, introduces FY20E CNP of RM378.2m. Downgrade to MP with lower TP of RM8.55 based on unchanged PBV of 1.72x (previously, OP; TP: RM8.95).

Below expectations. FY18 CNP of RM361.2m came in below expectations, making up 80%/78% of our/consensus estimates. The negative variance mainly stems from the escalation of operating cost in 4Q18, as management steps up their maintenance effort for both KLIA and KLIA2. A 9.0 sen dividend was declared, bringing the full-year dividends to 14.0 sen, which is in-line with our expectation.

Result highlights. FY18 CNP increased 98%, YoY backed by revenue growth (+4%) coupled with improvements in operating margin to 24% (+2ppt). 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 2%, which subsequently improved its operating margin. That said, lower effective tax of 7% (- 22ppt) also helped in lifting up its performance. QoQ, 4Q18 CNP plummeted by 90% despite registering revenue growth of 2%, bogged down by higher operating cost, which increased by 17% on higher operating capex in maintaining KLIA and KLIA2 in order to comply with MAVCOM’s QoS standards.

Outlook. Management released its FY19 headline KPIs targeting an EBITDA of RM2,163.3m with Malaysia’s EBITDA flattish at RM1,210.1m compared to FY18, despite targeting passenger growth of 4.9% in Malaysia coupled with an expected increase in PSC charges upon signing of the new operating agreement as management intends to incur more operational capex in for the maintenance for KLIA and KLIA2 in order to meet the QoS set by MAVCOM. That aside, management also indicated that Penang Airport is currently at 20% above its original capacity and a capacity upgrade/expansion is imminent in the near future followed by KLIA.

Earnings review. Post results, we cut our FY19E CNP by 32% as we incorporate a higher operating cost, which is in-line with management’s effort to enhance and maintain KLIA and KLIA2 in order to meet the QoS set by MAVCOM, and we also introduce our FY20E CNP of RM378.2m.

Downgrade to MP with a lower TP of RM8.55 (previously, OP; TP: RM8.95) post revision in earnings. Our TP of RM8.55 is based on the unchanged PBV of 1.72x pegged at +0.5SD to its 2-year average. Amid its operational challenges, we think our applied +0.5SD level is reasonable given that the potential revision in PSC charges would help cushion the higher operating costs.

Risks to our call include: (i) higher/lower-than-expected passenger growth, (ii) stable/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 - 01 Mar 2019