1QFY20 core net loss came in at RM20m compared to RM309m/RM162m of our/consensus full-year profit forecast, below expectations. The negative variance on our side is due to lower-than-expected contribution from retail and higher-than-expected losses in Turkey. This prompted us to downgrade FY20E/FY21E net profit by 41%/5%. However, we expect 2H to recover in anticipation of easing in travel restriction as economies globally are gradually reopening. TP is lowered from RM5.70 to RM5.45 based on 19x FY21E EPS. Reiterate OP.

Results’ highlights. QoQ, 1QFY20 revenue fell 31% in tandem with the contraction in passenger movements. Specifically, airport operations’ revenue declined by 32% due to lower revenue from the aeronautical (-32%) and non-aeronautical segment (-31%) due to the impact of COVID-19 pandemic and travel restriction imposed by the Malaysia and other countries. Non-airport operations revenue declined by 8% due to lower contribution from the hotel business. 1QFY20 recorded a loss of RM20m compared to a profit of RM29.5m in 4QFY19 attributable to: (i) provision for doubtful debts (RM88.9m) mainly due from airlines (provision for doubtful debt is recurring), (ii) lower-than expected contribution from retail duty-free in both Malaysia and Turkey, and (iii) losses at Turkey (RM34m). However, further losses were mitigated by lower total cost (-23% QoQ) including lower operating cost, user fee, depreciation and amortisation recorded during the period. No dividend was announced in this quarter as expected.

YoY, 1QFY20 revenue fell 25% in tandem with the contraction in passenger movements of 23.9% due to the impact of COVID-19 pandemic and travel restriction imposed by the Malaysia and other countries. Revenue from the aeronautical segment decreased by 22% due to lower passenger movement. Passenger traffic for the Malaysia operations contracted 28% (international: -32.8%, domestic: -22.0%). The passenger traffic for Turkey operations contracted by 12.3% (international: -6.7%, domestic: -15.7%). Non-aeronautical segment decreased 28.6% due to lower retail (-41%) and rent & loyalties (-21%). Correspondingly, 1QFY20 register a loss of RM20m due largely to losses at airport operations.

Outlook. We expect MAHB to be hit by COVID-19 in terms of passenger traffic growth both in Malaysia and Turkey. Management has highlighted that MAHB insisted that a 90-day credit period for rental of premises instead of rebates at the airport as well as landing and parking charges. For illustration purposes, assuming a 50% rebate on both rental and landing & parking charges and assuming a 3-month period, could cut revenue by 2-3%. While a prolonged pandemic would impact MAHB’s earnings, the experience from SARS suggest that passenger volume will see a recovery once the pandemic subsides.

Downgrade FY20E/FY21E net profit by 41%/5%. All in, we (i) cut our passenger growth assumption in FY20 from -12% to -20% and (ii) forecast a higher loss of RM80m compared to RM40m in FY20 in Turkey.

Re-iterate OP. Correspondingly, TP is reduced from RM5.70 to RM5.45 based on unchanged 19x FY21E EPS (-1.0SD below historical forward mean). Note that MAHB is likely to be excluded from the KLCI component index which is probably anticipated for some time but nevertheless do expect near term weakness as passive FBMKLCI index linked funds will remove it from their portfolios effective 22 June.

Risks to our call include: (i) prolonged Covid-19 disruption beyond the mid-year resulting in lower-than-expected passenger volume, and (ii) weaker-than-expected WACC from the RAB.

Source: Kenanga Research - 27 May 2020