What’s New

• 4Q/FY16 earnings met expectations

• Stronger Malaysian performance offset by larger Turkish unit losses

• Better FY17F outlook on more traffic optimism, but some cost escalation expected

• Raise profit forecast by 5%/4% in FY17/18F for better traffic, lift TP to RM7.05. Maintain HOLD

Still one foot in the mire. Malaysia Airports (MAHB) staged a relatively mild bottomline turnaround in FY16 as better Malaysian throughput in 2H16 was nullified by a wider-than- expected loss from its Istanbul Sabiha Gokcen (ISG) airport. While continued strong Malaysian passenger growth is expected, larger upsides still hinge on favourable revisions of terms in the Operating Agreement with the government. Meanwhile, continued losses from ISG continue to pose a barrier to its potential re-rating. Maintain HOLD.

Malaysia traffic growth picking up. 2016 pax growth trumped expectations with 6% expansion as air travel demand surged since 2H16. This is expected to hold with the group expecting 6.5% growth in FY17. That said, opex is expected to rise for staff and infrastructure-related needs, thus dampening its EBIT expansion. Looking further ahead, the finalisation of its discussions with the Malaysian government on the revised Operating Agreement will give more clarity to its long-term earnings potential.

Headwinds from Turkish operations. Air travel in Turkey was hit by two major incidents in 2016 – a terrorist attack on the key international Ataturk airport and an attempted military coup. Passenger traffic growth at ISG slowed to 4.8% in 2016 from c.20% in previous years. As the perception or incidences of instability require time to dissipate, growth may continue to be subdued in the near term.

Valuation

Our TP of RM7.05 is based on SOP valuation, where we value the Malaysian and Turkish operations using DCF, KLIA landbank at RM7.50 psf, and its stake in Hyderabad airport at book value. The DCF valuation of is Turkish operations make up c.21% of its SOP valuation. Our TP implies 1.5x FY17F P/BV.

Key Risks to Our View

Weaker passenger traffic. If passenger traffic at MAHB’s Malaysian or Turkish airports undershoots growth expectations due to weakened travel demand, there is downside risk to our earnings expectations.

Source: Alliance Research - 1 Mar 2017