1Q19 CNP of RM135.4m makes up 38%/26% of our/consensus full-year estimates. Expecting weaker quarters ahead due to higher operating costs, the results are broadly within our expectation. No dividend declared, as expected. Maintain OP with a higher TP of RM8.70 based on FY20E PBV of 1.72x (previously, TP: RM8.55, based on FY19E PBV of 1.72x).

Broadly within. 1Q19 CNP of RM135.4m makes up 38%/26% of our/consensus full-year estimates. However, we deem it as broadly within our expectation, as we expect weaker quarters ahead due to higher costs, i.e. airline incentives, tax, and lower contribution from its non-aeronautical segments. No dividend declared, as expected.

Results’ highlights. 1Q19 CNP declined by 6%, YoY, despite revenue growth of 3%, due to compression in operating margins from 30% to 26%. This is mainly driven by higher cost like direct labour (+43%), utilities (+20%), other costs (+143%) and higher airline incentives (+22%). QoQ, 1Q9 CNP grew 895% (low-base effect) amid flattish revenue growth, as management incurred a higher operating cost in 4Q18 in maintaining KLIA and KLIA2 to comply with MAVCOM’s QoS standards.

Outlook. In terms of the implementation of RAB framework, management remains hopeful that they can meet the implementation timeline in 1st January 2020. We expect the expansion of Penang Airport, which is currently operating 20% above its original capacity, is imminent in the near future followed by KLIA upon the implementation of RAB.

Earnings review. No changes to our FY19-20E earnings.

Maintain OP with a higher TP of RM8.70 (previously, TP: RM8.55 base on FY19E PBV of 1.72x), as we roll forward our valuation base year to FY20E based on PBV of 1.72x. Our ascribed PBV of 1.72x is 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) 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 - 3 Jun 2019