Malaysia Airports Holdings Berhad (MAHB) registered YTD 9MFY19 passengers growth of 4.8%, deem in line with our 5.2% forecast. Headline 3QFY19 total passenger movement registered 7% QoQ growth which is the highest recorded for a quarter where international and domestic passenger movements increased by 8% and 6%, respectively. No changes to our FY19/FY20E earnings. Maintain MP with an unchanged TP of RM8.70.

QoQ, 3QFY19 achieved a quarterly record. MAHB’s 3QFY19 (including Istanbul Sabiha) recorded 7% QoQ growth to 37m in passenger movements where international and domestic passenger movements increased by 8% and 6%, respectively. On the local front in Malaysia, international passengers rose 4% due to improvement in Asean (+6%) and non-Asean (+2%) while domestic passenger movements rose 4%. The growth is largely driven by KLIA main with growth in international (+8%) and domestic (+10%). KLIA2 saw flat growth for both Asean and non-Asean segments. We believe the passenger traffic movements were driven by continuous tickets promotions and fleet expansion by airlines. Specifically, 3QFY19 saw 18 airlines registering double-digit growth. A total of 17 airlines including 4 new ones that were not operating in September 2018, registered double-digit growth for September 2019 for international passenger movements.

ISG double-digit growth in 3QFY19 due to summer holidays. Istanbul Sabiha Gokcen International Airport (ISG) was a high traffic growth airport, charting double-digit growth mainly driven by the international sector that has been continuously registering double-digit growth since January this year. SGIA international and domestic passengers’ traffic rose 21% and 9%, respectively, due to the summer months and holidays there. We expect the strong growth to taper off in 4QFY19.

9MFY19 passenger growth came in line with our forecast. 9MFY19 passenger registered YTD 9MFY19 growth of 4.8%, deem in line with our 5.2% forecast. The solid 4.8% overall passengers growth was driven largely by Malaysia domestic (+10%) and Asean (+3%). SGIA’s overall passenger movement continued to register growth (+3%) despite the negative growth recorded from the domestic sector (-6%) and more than offset by international (+20%). 9MFY19, the ratio of international to domestic passengers for Malaysian operation remained at 51:49 which bodes well since passenger service charge for international passengers is higher compared to domestic passengers.

RAB framework potential re-rating catalyst for Malaysia Airport. While we like MAHB as an attractive play on the propensity for air travel in the region due to rising per capita income, the stock has risen 32% over a 52-week period and is currently trading at rich valuations of 25x on FY19E earnings and 22x on FY20E earnings. Over the horizon, there is potential earning or rating upgrade catalysts upon the release of the final consultation paper on the implementation of RAB in mid October.

Maintain MP. Pending the final quarterly results sometime in Nov, we keep our earnings forecast unchanged. Our TP is RM8.70 based on 22x FY20E EPS (at +1.0SD above 5-year historical forward mean) which is at a 20% discount to regional peers’ average to reflect MAHB’s relatively smaller market capitalization.

Risks to our call include: (i) lower-than-expected passenger growth, and (ii) weaker-than-expected WACC from the RAB.

Source: Kenanga Research - 11 Oct 2019