MAHB  (Malaysia  Airports  Holdings)  announced  yesterday  that  its contractors may have difficulty completing KLIA2 on schedule for the 28 June  opening  date.  It  did  not  give  a  new  opening  date.  We  see  a potential  MYR1bn  investment  tax  allowance  and  extension  on  its concession mitigating the negative impact arising from the new airport’s delay.  We  keep our earnings  forecasts  pending  the announcement  of  a new opening date. Maintain BUY, with our MYR7.23 FV unchanged. 

-  KLIA2  unlikely  to  be  completed  on  time.  MAHB announced on  Bursa that its contractors may have difficulty completing KLIA2 for the 28 June opening  deadline,  despite  having  given  their  assurance  earlier.  The company  said  its  Management  will  be  meeting  the  contractors  soon  to find  out  when  they  can  complete  the  low  cost  carrier  (LCC)  terminal. While the airport operator did not proffer a new date for KLIA2’s opening, we  think  a  six-month  delay  is  likely.  Even  if  the  new  terminal  could  be 
completed by September after a two-month delay, MAHB would still need to carry out operation trial runs that may require at least four months. 

-  But  costs  overruns  unlikely.  In  yesterday’s  announcement.  MAHB emphasized  its  contractors’  inability  to  fulfill  their  commitments  to complete  KLIA2  on  schedule  for  its  targeted  28  June  opening. We  view this as an indication that MAHB is unlikely to assume  any cost overruns since  the  delay  is  not  due  to  variations  in  the  terminal’s design  and  the contractual terms are fixed.  

-  Potential  catalysts  in  investment  tax  allowance  and  concession extension.  Judging  from  the  strengthening  in MAHB’s share  price  early his  week  after  the  country  held  its  general  elections  –  which  may  have also removed the overhang on its stock – we think the share price could have  priced  in  a  likely  six-month  delay  in  KLIA2’s  opening,  at  most. Neutralizing  this  negative  factor  is  the  high  possibility  of  the  airport operator  getting  approval  for  a  tax  relief  totaling  MYR1bn  from  its investment  tax  allowance.  Now  that  the  polls  are  over,  there  is  also greater  certainty  that  the company  will  obtain an  extension on  its  airport concession.

 Upside to revised FV if KLIA2 is delayed. We had earlier set an indicative FV of MYR6.50 should KLIA2’s opening date be revised to 1 Jan 2014. However, this FV could be revised higher due to the high chance of MAHB obtaining an investment tax allowance and chalking up higher non aeronautical revenue and airport tax revenue should new airline Malindo commence its turboprop operations at the Subang terminal.

 Maintain BUY. We are maintaining our earnings forecasts for now pending the announcement of a new opening date. Maintain BUY, with our MYR7.23 FV unchanged, premised on a WACC of 7.6%. On an EV/EBITDA basis, our FV gives an implied value of 11.4x on the company’s FY14 EBITDA. We are using a FY14 earnings estimate as it is better yardstick to gauge the company’s valuation in view of the full contribution from KLIA2 by then. At an 11.4x implied EV/EBITDA, MAHB’s valuation multiple is at a 15% premium to its peers’ current average but at 15%-20% discounts to the average of mature airports with high free cash flow yields. We view this as justifiable in light of the potential catalysts in KLIA2 and the development of the company’s landbank. While concerns of a deferment in KLIA2’s opening will hit investor sentiment once the extent of the delay is made known, we advocate investors to accumulate the shares on any price weakness as MAHB’s fundamentals and growth prospects remain promising.

Source: RHB