Malaysia Airports’ earnings missed expectations on higher operating costs in Malaysia, but this was cushioned by a surprise earnings turnaround posted by its Turkey operations. Maintain BUY with a lower DCF-derived TP of MYR7.76 (from MYR8.11, 28% upside), as we cut our earnings forecasts on the back of lower passenger growth assumption for 2015 of 4% (from 6%).

A miss, but cushioned by Turkey’s unexpected profit. 1H15 core losses came in at MYR40.6m, with 2Q15 losses of MYR20.0m seeing only a marginal QoQ improvement. Malaysia operations incurred higher utilities, maintenance and staff (on lumpy bonus) costs coupled with flattish traffic growth in 1H15. This was, however, cushioned by the unexpected turnaround in earnings achieved by its Turkey operations (2Q15: EUR4.1m vs 1Q15: EUR6.9m loss), thanks to higher passenger growth (+16.6% YoY in 1H15), duty-free spending and rental charges. Included in the headline numbers was a net gain on disposal of the New Delhi stake, offset by one-off provisions on doubtful debts. An interim dividend of MYR0.04 (vs MYR0.02 previously) was also declared.

Cutting earnings on lower passenger growth. We now expect Turkey operations to make a slight profit of EUR0.7m vs a slight loss earlier. This, however, will not be enough to offset the drop in our earnings forecast for Malaysia operations, as we lower Malaysia’s passenger growth assumption for 2015 to 4% (from 6% earlier). Our FY16 and FY17 passenger growth assumptions are now 6% (from 5%) and 4% (unchanged) respectively. Consequently, our FY15/FY16/FY17 earnings estimates are cut by 54%/4%/2% respectively.

Briefing highlights. Management is confident of achieving 3% passenger growth for 2015 given the seasonally stronger traffic in 2H, as indicated by its scheduled capacity pipeline. We have a higher forecast as we think passenger growth will be stimulated by lower air fares (due to the fuel surcharge removal), with likely more impact in 2H. Meanwhile, the concession extension is still in negotiations and will need to be reviewed by the Malaysian Aviation Commission, which has yet to be set up.

Maintain BUY with a lower TP. Post-earnings revision, we reiterate our BUY call on Malaysia Airports with a lower DCF-derived TP of MYR7.76 (see Figure 2), implying 10.8x FY15 EV/EBITDA, which is slightly below the peer average of 13x.

Financial Exhibits

SWOT Analysis

Company Profile

Malaysia Airports Holdings Bhd is the operator of all airports in Malaysia except for Senai Airport. It also owns stakes in airports overseas in Turkey (Sabiha Gokcen Airport) and India (Hyderabad).

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Source: RHB Research - 31 Jul 2015