• Pax growth remains robust in July 2017

• Growth led by international, with balanced growth from Asean and non-Asean

• ISG continues to improve

• Maintain BUY with TP of RM9.98

July passenger traffic at Malaysian airports grew +5.2%yoy despite the high base where the Hari Raya festive holidays fell in July 2016. Total pax recorded was 8.3m, the highest in terms of monthly pax for Malaysian airports in 2017. Year-to-date, pax growth stands at +10.3%yoy.

Growth bolstered by international pax. International and domestic traffic growth was less even compared to June 2017 as international pax outpaced registering a growth of 11.7%yoy compared to domestic pax which declined -1%yoy. The relaxation of visa requirements for China and India, the Hajj season, the favourable exchange rate and increased seat capacity were among the factors that boosted international travel.

Good balance between Asean and non-Asean. Delving into the composition of international pax, growth between Asean and non-Asean pax displayed balanced growth, recording increases of +12.8%yoy and +10.6%yoy respectively. Passenger traffic from 12 countries registered double-digit percentage increases - Asean countries: Indonesia, Vietnam, Philippines, Cambodia and non-Asean countries: China, India, South Korea, and Saudi Arabia.

KLIA MTB growth tapered by KLIA2 still healthy. In terms of airports, KLIA main terminal’s (KLIA MTB) growth tapered to +2.5%yoy as the effects of Malindo’s shift to KLIA MTB and MAB’s capacity cuts in early 2016 which caused a low base effect diminished. KLIA2’s growth remained healthy at +16.3%yoy as Airasia and AAX expanded their capacity. Overall load factor for carriers stood at 77.5%.

ISG turnaround continues. Pax traffic registered its first double-digit percentage growth in 2017, with July growing +12.7%yoy. Positively, both international and domestic pax grew strongly, at +15%yoy and +11.6yoy respectively, as the summer holidays travel season is in full swing.

Maintain BUY with TP of RM9.98 based on our DCF model assuming WACC of 7.8% and Beta of 1.1. We like MAHB as a proxy to Malaysia’s resilient inbound/outbound travel industry, as the largest airport operator in Malaysia. MAHB received an extension of its operating agreement (OA) which will last until 2069, providing clarity to investors on its longer term prospects as an airport concessionaire. Meanwhile, the company has imposed onto itself a 1-year timeframe for negotiations with the Government on the terms and conditions for its OA extension. Items of interest to us include the rate of user fee it pays to the Government and source of funding for capital expenditure, of which favourable negotiations could prompt upward revisions to forecasts.

Source: MIDF Research - 11 Aug 2017