With the recent coronavirus outbreak, Macquarie Equities Research (MQ Research) expects only a short term impact on air passenger traffic volumes for Malaysia Airports Holdings (MAHB), with a conservative forecast of a 5% growth in FY20 after the company’s operations saw +5.8% pax growth (+2.8% international) in FY19.

MQ Research maintains Outperform on MAHB, with a 12-month target price of RM9.00.

Bottomed-out Valuations

• Based on similar historic events (2003: SARS, 2014: twin tragedies) MQ Research expects the impact of the coronavirus on MAHB’s passenger traffic volumes to be transient in nature. However, MAHB’s valuations have fallen below the March 2019 lows when more structural concerns prevailed – risk of an Airport REIT. MQ Research’s discounted cashflow (DCF) based target price (TP) implies a 9.1x EV/EBITDA multiple (-0.75StdDev), and 40% total shareholder return (TSR). MAHB is MQ Research’s top pick for the sector.

Considerations

• MAHB’s Malaysian operations saw +5.8% pax growth (+2.8% international) in FY19. MQ Research is forecasting a mere 5% growth in FY20, which is fairly conservative in their view. MQ Research’s EBITDA assumptions are 5.4% below consensus and their base case is for a transient three-month depression in passenger volumes due to the coronavirus outbreak. Management guides that some major carriers have already redirected capacity from Northeast Asia to South Asia. Additionally, MQ Research expects MAHB to enjoy a full year of profits (RM61m profit before tax (PBT)) from its Turkish arm, which broke even in 3Q19, riding on robust international passenger growth.

• Based on recent feedback, clients flagged concern that one of the major operators at KLIA might cut capacity – AirAsia X (AAX MK, Not Rated). AAX is a long-haul low-cost carrier that makes up 13% of MAHB’s KLIA volumes.

• Another risk to consider is the potential rebalancing of MAHB out of the benchmark FBMKLCI that consists of 30 stocks. At RM11bn MAHB is now the smallest market cap stock on the index (second to AmBank at 11.4bn). However, the FBMKLCI rebalancing only takes place in June.

Earnings and Target Price Revision

• No change.

Price Catalyst

• 12-month price target: RM9.00 based on a Sum of Parts methodology.
• Catalyst: deceleration of coronavirus new reported cases.

Action and recommendation

MQ Research reiterates Outperform. MQ Research thinks MAHB is a bargain at the current depressed valuations, considering the risks to profitability are primarily transient. MAHB screens as cheap vs regional peers.

12-month Target Price Methodology

• MAHB MK: RM9.00 based on a Sum of Parts methodology
• AAGB MK: RM1.00 based on a EV/EBITDAR methodology

Source: Macquarie Research - 5 Feb 2020