INVESTMENT HIGHLIGHTS

• Sabah government mulling over building a new airport in Kota Kinabalu

• Although number of passengers nearing maximum capacity, there is still time as the airport is still below peak hour capacity

• Reopening of KKIA’s Terminal 2 would serve as an immediate solution to the expected congestion

• Development of a new airport would be a matter for the medium term

• Maintain BUY with an unchanged TP of RM9.43 per share

A new airport in Kota Kinabalu? According to a media report, the State Government of Sabah is mulling to build a new airport for Kota Kinabalu to cater future demand. Kota Kinabalu International Airport (KKIA) is Sabah’s largest international airport and makes up around 11.0% of MAHB’s total passengers in Malaysia for FY18. Chief Minister of Sabah, Datuk Seri Mohd Shafie Apdal stressed that the new airport was necessary for Sabah to accommodate the growing number of visitors or tourists into the state. In 2018, KKIA recorded a total of 8.6m passengers nearing its capacity of 9.0m passengers, translating to a 95.5% utilisation rate.

Not to worry, there’s still time. The capacity of 9.0m passengers per year is expected to be breached this year. Nevertheless, on a peak hour passenger basis, KKIA is still operating below capacity (projected capacity at 2,485 passengers compared to design peak passenger capacity per hour of 3,200 passengers according to MAVCOM’s latest consultation paper). MAHB has also budgeted RM100.0m for capex in its June 2019 submission for KKIA, indicating that the need for the airport’s expansion. The expansion works include master planning and schematic design work with maintenance and asset optimisation.

Our view. In the immediate term, the reopening of KKIA’s Terminal 2 will be able to ease the airport’s congestion. Recall that AirAsia Group Berhad (AAGB) ceased operations in KKIA’s Terminal 2 effective 1 December 2015 after 12 years of operations. AAGB has expressed interests to return to the terminal last year, proposing to spend roughly RM20m for the terminal to handle 5.0m passengers per annum. In 2018, AAGB dominated capacity at KKIA as it carried 5.7m passengers (+23.0%yoy). As such, we believe that the reopening of KKIA Terminal 2 would be an immediate option to handle increasing passenger traffic.

Environmental risks of expansion at current location. Meanwhile, an option to expand the airport from its current location with another runway would pose environmental issues as construction will involve land reclamation and affect the Tanjung Aru Eco Development. As such for the longer term, it is likely for the airport to be developed elsewhere. According to the Chairman of the Chartered Institute of Logistics and Transport of Sabah, it will potentially take between 5 to 6 years, with 2 to 3 years for land acquisition and another 3 years to build the airport.

Possible invitation for third party funding. With the lack of details, we believe that the talk of a new airport in Kota Kinabalu is to ensure the state will be able to cater for its continuous rapid growth in tourism. Moreover, the state is expected to be getting its own carrier called Sipadan Air sometime in September this year. Sipadan Air will be commencing flights between Kota Kinabalu and Semporna. Meanwhile, in terms of funding, the possible development of Kota Kinabalu’s new airport could possibly open doors for private investors to participate. However, such arrangements would depend on the terms negotiated in new operating agreement between MAHB and the Government of Malaysia and the finalised Regulated Asset Base (RAB) framework.

Earnings estimates unchanged. No change to our earnings estimates.

Maintain BUY. In the meantime, MAHB’s Malaysia operations will be supported by accommodative visa policies in Malaysia for tourists from China and India which will temper the pressure from the impending international departure levy. As such, we strongly believe that MAHB passenger numbers in Malaysia can surpass the 100m mark in 2019, while maintaining a relatively conservative growth rate of 3.5% which translates to 102.5m passengers. All factors considered, we are maintaining our BUY call on MAHB with an unchanged target price of RM9.43 per share based on discounted cash flow valuation.

Source: MIDF Research - 29 Jul 2019