INVESTMENT HIGHLIGHTS

• MAHB recorded RM236.5 core PATAMI for FY17

• Stark improvement from last year

• Increase in international traffic, a positive

• Maintain BUY with an adjusted TP of RM9.80

Missed expectation. MAHB’s FY17 net earnings missed expectations despite growing by more than threefold to RM236.5m (>+100%yoy). It accounted for 71.0% and 83.0% of ours and consensus’ expectations respectively. For 4QFY17, net earnings were lower at RM27.9m vs. RM36.8m in the same period last year which was due to one-off provision in the staff expenses.

Can be considered a solid year for MAHB. Despite falling short of estimates, the group’s FY17 performance showed strong improvement. We note that earnings expansion was due to the solid growth in revenue, where it grew +11.5%yoy. PSC which represents 72% of FY17 aeronautical revenue grew by +16.6%yoy, as a result from strong passenger growth. Recall, the group’s FY17 passenger growth was up by +7.8%yoy. Meanwhile, retail segments grew double digit at +15.4%yoy, backed by the encouraging growth of international traffic in Malaysia.

International traffic outpaced domestic passengers. International traffic growth in Malaysia had outpaced the domestic, where it advanced +14.1%yoy. Consequently, international passengers now account 51.2% of total traffic (vs FY16:48.7%). In our view, the expansion of this particular traveller segment will augur positively with the prospect of retail and rental earnings, as MAHB continues to develop its land bank to cater the growth of these high value passengers. As of FY17, we have seen retail and rental segments contributed positively to the group’s earnings, where it cumulatively grew by +15.4%yoy and +9.1%yoy.

Increase in expenses. Overall expenses were up by +14.8%yoy, where almost 75.0% was comprised of operational costs. Majority of the costs were incurred for staff expanses, attributable to annual salary increment of 3-6% and higher bonus provisions. Moving forward, we are not too concern on this as historical opex showed an annual average growth of +9.0-14.0%yoy. We believe with the average of 3-year historical EBITDA growth of ~+40.0%, this will more than offset the cost increase.

On CAPEX expansion. Management guided that the group’s CAPEX will likely see a notable jump in the near term. This is due to implementation of several measures placed by MAVCOM to increase the standard of the airport service. The new rulings will see MAHB to take more proactive steps to improve the current services. While the initial impact was perceived as detrimental to MAHB, increasing the cost of maintenance, compliance and development CAPEX, we believe that the new rulings set a clearer standard for airport operator which will increase the “feel good” factor for the airport. We believe that this will drive spending at the airports. Consequently, we recall that management has projected 30% increase in CAPEX for the next three years which may amount to an absolute figure of RM500-600m of CAPEX in FY18. Assuming a straight-line depreciation (until the end of concession period), this could increase annual depreciation by ~+6.3%yoy.

Earnings revised downward. Given the results came in below our expectation, we adjust our earnings forecast downward for FY18 and FY19 by -22.6% and -14.8% respectively. This adjustment is also taking into account the higher planned CAPEX spending for the next two to three years.

Maintain BUY with adjusted TP of RM9.80 (from RM9.98) based on our DCF assuming WACC of 7.8% and Beta of 1.1. We are adjusting downwards our TP as we take into account the CAPEX spending. However, we continue like MAHB as a proxy to Malaysia’s resilient inbound/outbound travel industry being the largest airport operator in Malaysia. Positive drivers for MAHB includes 1) the expansion of international passengers traffic in Malaysia and 2) capacity expansion and entries of foreign airlines, catering to long-term structural demand of air travel. Hence, we maintain our BUY call for MAHB.

Source: MIDF Research - 22 Feb 2018