INVESTMENT HIGHLIGHTS

• Earnings boosted by lower depreciation and amortisation

• First double-digit quarterly pax growth since 1QFY14

• Rising trend in operating expenses likely to persist

• Conservative targets set for FY17

• Maintain BUY with higher TP of RM7.75 (from: RM7.60)

Earnings boosted by lower depreciation and amortisation. MAHB reported 4QFY16 core PATAMI of RM37m which contributed to a full year FY16 core PATAMI of RM78m (FY15: core net loss of -RM12m). The results were better than our forecasts as MAHB made a retrospective positive adjustment to depreciation and amortisation amounting to RM150m following the extension of its concession period by an additional 35 years ending 2069.

First double-digit quarterly pax growth since 1QFY14. Fourth quarter revenue rose +4%yoy, mainly underpinned by a +10%yoy growth in airport passenger traffic (excluding SGIA) and improved composition of international passengers which are higher yielding in terms of PSC. Meanwhile, higher international passengers translated in higher retail sales which saw its average spending per pax rise +5%yoy.

Rising trend in operating expenses likely to persist. For 4QFY16, operating expenses increased +9%yoy. Particularly nagging were staff, maintenance and user fee expenses which together represent 72% of MAHB’s overall quarterly RM568m operating expenses. We expect these expenses to remain elevated predicated on its 1) collective agreement with staff on salary increments and bonuses, 2) higher maintenance on PPE in klia2 following the conclusion of its defect liability period and 3) annual rise in user fee rate by at least 25 basis points per annum. However, MAHB’s bottom line should be largely cushioned by quarterly savings of RM35m-RM38m from lower depreciation charges.

Conservative targets for FY17. Looking ahead, management targets an EBITDA growth of +5%yoy for FY17 after factoring in higher operating expenses and a +6.5%yoy growth in passengers in its Malaysian airports. In view of the robust growth in capacity of domestic and foreign airlines, we raise our FY17 forecast for passenger growth to +6.8% (from: +4%) and assume lower depreciation and amortisation expenses. Hence, our earnings forecast for FY17 is revised upward by +10%.

Maintain BUY with TP of RM7.75 (from RM7.60) following our upward revision to FY17 earnings forecast based on our DCF model assuming WACC of 7.7% and Beta of 1.1. We rate MAHB a BUY predicated on its 1) Robust passenger traffic growth with airlines expanding capacity, 2) Extended concession period of 35 years ending 2069 and 3) Abundant landbank surrounding its Kuala Lumpur hub with the potential of securing joint ventures partners in creating new avenues of income under its KL Aeropolis project.

Source: MIDF Research - 1 Mar 2017