• Pax growth has been robust in 1HFY17

• We believe this would continue into 2HFY17

• Airline capacity expansion, higher average load factors and a pick-up in tourism would bode well for MAHB

• Upgrade to BUY with TP of RM9.98

Passenger traffic growth at Malaysian airports reinvigorated. In the second quarter of 2017, passenger traffic at Malaysian airports amounted to 23.7m passengers, registering a growth of +13%yoy. The quarter was outstanding for three reasons: 1) It was the best second quarter (Apr-June period) performance in terms of passenger traffic, 2) it exceeded 4QFY16’s 23.5m pax which was seasonally stronger and the highest in MAHB’s history and 3) it marked the third consecutive quarter (4QFY16-2QFY17) where passenger traffic rose by double-digit percentage growth after enduring 10 quarters of flattish growth (2QFY14-3QFY16 average growth: +1.8%yoy).

Pax growth has been stellar in 1HFY17… Malaysia’s total pax traffic grew +11%yoy in 1HFY17, totalling 46.9m. Growth was driven by international traffic which expanded +14.5%yoy, outpacing domestic traffic growth of +8.1%yoy. Interestingly, international traffic growth had been underpinned by the non-Asean traffic which expanded by +18%yoy compared to Asean traffic which grew +11%yoy. In terms of airports, KLIA main terminal (KLIA MTB) led the way, registering a growth of +22%yoy, followed by KLIA2 and other MASB airports which both grew +7%yoy.

…and will likely continue into 2HFY17. The strong performance in the first half, in our view, sets the tone for a robust second half. Hence, we are revising our passenger growth forecast for Malaysian airports for FY17/FY18 from 6.5%/3% to 8.2%/4% respectively. Our optimism stems from 1) aggressive capacity expansion by local and foreign carriers, 2) higher average load factors supported by increased travel demand and, 3) an anticipated pickup in inbound tourist arrivals in 2HFY17.

Upgrade to BUY with TP of RM9.98 based on our DCF model assuming WACC of 7.8% and Beta of 1.1. Against the backdrop of improving passenger traffic, we lift our earnings forecasts to incorporate higher PSC revenue collection and retail sales. We like MAHB as a proxy to Malaysia’s resilient travel demand and improving tourism industry, as the largest airport operator in Malaysia. In addition, MAHB received an extension for its operating agreement (OA) with the government which will last until 2069. This allays any concerns on the right to operate its concession assets while spreading depreciation and amortisation charges over a longer period. This aside, we are starting to see higher interest from third parties in relation to the KLIA Aeropolis project, with Alibaba’s logistics arm, Cainiao signing an MOU to set up its regional distribution hub.

Source: MIDF Research - 18 Jul 2017