Macquarie Equities Research (MQ Research) trimmed Malaysia Airports’ (MAHB) target price (TP) slightly lower to RM7.35 and lowered its FY21 net profit by 71% to RM216mn due to its reduced forecast of the passenger traffic volume for FY20/21 to 45%/+45% y/y. However, MQ Research maintains an Outperform rating on MAHB due to the company’s strong balance sheet having sufficient access to liquidity to survive temporary working capital stress. MQ Research also expects passenger’s capacity to return to normal by 2022.

Key Points

• MQ Research cuts FY20/21 passenger traffic volumes to -45%/-20% below FY19A. Increase FY20
• MQ Research expects the Operating Agreement (OA) will be inked with the government by end-2020, while the Regulated Asset Base (RAB) discussions may take subsequent 12-18 months to resolve.
• Maintain OP with slightly lower RM7.35 TP. Maintain preference for airports over airlines on stronger balance sheet & minimised competitive pressure.

Event

• MQ Research downgrade its passenger traffic volumes forecast from -36%/+75% y/y to -45%/+45% y/y for FY20/21. This is broadly in-line with IATA’s global passenger volume forecasts (link). MQ Research’s assumptions imply that airports will be operating at 55%/80% of FY19A’s passenger capacity in FY20/21 respectively, returning to business as usual in FY22. In turn, this lowers MQ Research’s FY20 net loss forecast to -RM409m and FY21 NP to RM216m. MQ Research also reduced rental discount assumptions (to tenants) and increased staff cost containment from -2% to -5% following 1Q20 results brief. MQ Research flags that MAHB will see substantial working capital stress over the next 9 months, as payments from tenants are deferred. Provisions are also expected to be booked against said deferments (IFRS 9).

• However, MAHB has sufficient access to liquidity to weather the transient working capital stress. While MQ Research’s forecasts are substantially lower than consensus, MQ Research reiterates its Outperform call with a slightly lower target price of RM7.35. MAHB’s strong balance sheet underpins the group’s intrinsically robust cash generation potential in FY22 onwards once operations return to normal. At the current share price, MAHB is valued at an implied 4.9x FY22E entreprise value (EV)/earnings before interest, tax, depreciation, and amortization (EBITDA). At MQ Research’s TP, the implied FY22E EV/EBITDA multiple is 5.8x.

Impact

• Beyond the Covid-19 crisis, MQ Research expects regulatory updates to be a catalyst for re-rating. Based on recent updates from the government (link) MQ Research expects MAHB will iron out the OA with the government by end-2020. The pertinent terms under the OA will formalise capital recovery mechanisms to enable MAHB to earn a fair return on critical airport capex programs. Beyond the OA, MQ Research expects the RAB discussions are underway, providing a further medium term catalyst; although political risk may prove disruptive.  

Earnings and Target Price Revision

• MQ Research increases FY20 net loss by 102% to -RM409m; lower FY21 NP by -71% to RM216m. MQ Research trims its TP to RM7.35 from RM7.50.

Price Catalyst

• 12-month price target: RM7.35 based on a Sum of Parts methodology.
• Catalyst: Signing of OA, opening of air travel, updates on RAB discussion.

Action and Recommendation

• Maintain Outperform with lower TP of RM7.35.

Source: Macquarie Research - 22 Jun 2020