Malaysia  Airports’  1Q14  earnings  came  within  our  forecasts.  Despite the  stronger  numbers,  we  anticipate  weaker  earnings  ahead  on  the higher costs of operating KLIA2.  The airport’s  opening is on track and is  set to be  an earnings  driver from the higher rental revenue earned, given  that  its  retail  space  is  4x  bigger  than  the  existing  Low  Cost Carrier Terminal (LCCT). We maintain our BUY call and MYR9.80 FV.

• A  strong  quarter  but  weakness  ahead.  Malaysia  Airports  posted higher than expected 1Q14 core earnings of MYR131m (y-o-y: +18%; qo-q: +76%) on the backdrop of MYR659m  in revenue  (y-o-y: +15%; q-oq:  -4%). The core earnings of  MYR131m accounts for 41% of our fullyear forecast and 30% of consensus estimates. While it appears that the company’s  numbers  looks  strong  in  1Q,  we  foresee  KLIA2’s  higher operating  costs  and  depreciation  charges  could  result  in  weaker earnings over the ensuing quarters. Hence, we make no changes to our net  profit  forecasts.  As  a  cross-check,  Malaysia  Airports’  MYR245.5m 1Q14 EBITDA  accounted for 25.2% of our full-year forecasts. Core net margins  improved  to  20%  (4QY13:  11%;  1Q13:  19.5%)  on  lower  than expected staff costs (in absence of bonus provisioning), a lower effective tax rate and lower than expected depreciation.
• Getting  compensation.  Malaysia  Airports  accrued  government compensation  for  not  passing  on  the  scheduled  passenger  service charge  (PSC)  hike  to  passengers.  In  the  1Q14,  the  airport  operator accrued  revenue  of MYR11.6m from government compensation on the PSC  claim,  which  has  taken  effect  since  12  Feb  2014.  Management highlighted  that  this  reflected  a  9%  PSC  increase.  However,  we  have only  inputted  a  conservative  5%  hike  on  its  blended  airport  tax  hike, factoring  in  the lower PSCs collected from carriers, which had previously operated out of KLIA, but would now be flying out of KLIA2.   Briefing  highlights.  Management  is  targeting  a  9.7%  rise  in  full-year traffic,  noting that  the 18% y-o-y growth seen in 1Q14 was due to  last year’s  low  base.  Growth  rate  is  expected  to  moderate  down  further. Furthermore, the MH370 incident has  also dampened passenger travel, notably from China, although this is expected to be temporary. The longdue concession extension is still pending, of which  Malaysia Airports is looking  to  finalise  this  year.  As  for  the  costs  of  KLIA2,  management maintains  that  it  will  remain  capped  at  the  MYR4bn  budget.  We  will follow up with more updates from today’s KLIA2 visit next week.

Other updates 
abiha  Gokcen.  Sabiha  Gokcen  Airport  is  on  track  to  be  profitable  next year,  as  1Q14  passenger  traffic  jumped  37.2%  y-o-y.  Management highlighted that 1Q14 losses at the airport narrowed substantially to EUR8m from 1Q13’s EUR24m. Management is  targeting a full year loss of EUR10m this year but could start to be profitable next year. Our DCF value on Sabiha Gokcen of MYR1.60/share is premised on very conservative assumptions of which  we  only  expect  the  airport  to  be  profitable  by  2017.  We  will  likely revisit these numbers again.

2020 targets. Management revealed that by 2020, Malaysia Airports targets to handle 110m passenger per annum with a revenue and EBITDA target of MYR5bn and MYR1.65bn  respectively. By then, the KLIA Aeropolis will see a  total  of  3,000  acres  of  commercial  land  being  developed,  which  could possibly  include  a  theme  park,  medical  tourism  facilities  and  golf  resorts.

Currently  in  the  development  stage  is  a  factory  outlet  section,  of  which Malaysia Airports has inked a joint-venture (JV) partnership with Mitsui, with the former holding  a 30% associate stake.  In  comparison to our forecasts, some  of  these  2020  targets  look  achievable.  We  forecast  that  Malaysia Airports  could handle as much as 118m passengers by 2020, albeit with a much  lower  revenue  and  EBITDA  forecast  of  MYR4.7bn  and  MYR1.33bn respectively.  Note,  however,  we  have  not  incorporated  any  earnings  from new commercial land developments, thus suggesting potential upside to our numbers.

Only 50%  retail space outlets to be filled upon KLIA2’s  opening day. Due  to  the  completion  delays,  some  of  Malaysia  Airport’s  tenants  are  not expected  to  begin  operating  on  the  first  day  of  the  KLIA2  opening  date, which is scheduled for  2 May. Management targets that most of these retail outlets will start  their operations  by June. As for rental yields, management guided that yields for KLIA2 – on average – will still be lower than KLIA’s. BUY maintained. We maintain our BUY call on Malaysia Airports.  As no changes to our  assumptions  were  made,  our  DCF-derived  FV stays  at  MYR9.80,  of  which  we have also factored in a MYR1.60 valuation for its airport  in Turkey, Sabiha Gokcen. Our  DCF  for  its  Malaysia  operations  are  derived  from  a  7%  WACC  while  its operations in Turkey  are  premised on a higher WACC of 11.9%. W e continue to like Malaysia  Airport’s  KLIA2  theme,  which  could  propel  its  cash  earnings  moving forward.  W e  project  for  its  FY14  EBITDA  to  grow  by  23%,  banking  on  the  higher rental  revenue  raked  from  KLIA2  and  noting  that  its  retail space  area is  4x  bigger than the ones at the current LCCT.

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Malaysia Airports is the operator of all the airports in Malaysia except for Senai Airport. It also owns stakes in airports overseas in Turkey and India.

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Source: RHB