We reinstate coverage on MAHB with a NEUTRAL rating and DCF-derived MYR6.80 TP, amidst a lack of near term re-rating catalysts. We do not expect any PSC increase in the next 1-2 years and think that pedestrian passenger traffic growth in Malaysia and the appreciation of the MYR/EUR rate may continue to weigh on the expected strong growth from its Turkish unit. A 10% appreciation in the MYR vs EUR lowers our EBITDA and valuation by 5% and 3% respectively. The spot EUR/MYR exchange rate of 4.44 is already 4% above our in-house forecast of 4.61.

Earnings still sluggish. We expect Malaysia’s passenger traffic to grow by 2.1% YoY in 2016 (2015: +0.3% YoY). This is in addition to higher passenger service charges (PSC) from Malindo’s operations returning to Kuala Lumpur International Airport (KLIA), AirAsia’s capacity expansion and a limited further reduction in Malaysian Airlines’ (MAS) capacity – which should support a modest earnings growth. Still, we expect the absolute value of earnings to remain sluggish when compared to the one over the past few years. Missing near-term catalysts. We do not expect any increase in Malaysian PSC over the next 1-2 years, as the stipulated hike is scheduled once every five years, with the next one expected only in 2019. An increase in Turkish PSC, if any, may only occur in 2020 once the new Istanbul airport is operational. However, we anticipate that a 10% higher-than-estimated passenger traffic for Malaysia and Turkey could increase our EBITDA estimates and valuation by 9 and 14% respectively (Figures 14 and 15).

Strong Turkish growth remains exposed to appreciating MYR. Following our recent visit to Turkey and meeting with ISG airport’s management, we estimate it is doable for the ISG airport to achieve a double-digit passenger traffic growth over the next few years, with 2016F growth at 15.3% YoY. Malaysia Airports’ (MAHB) Turkish unit may account for c.47% of EBITDA in 2016 which may rise to c.52% by 2020. However, contributions from Turkey remain exposed to the MYR/EUR exchange rate.

Multiple valuation estimates imply a limited upside. Our DCF-derived MYR6.80 TP implies a forward EV/EBITDA of 9.7x, which lies between the average and +1SD from its forward EV/EBITDA multiple, which we think is fair given the weak growth outlook and downside risks. More details on DCF and EV/EBITDA valuations are in Figure 1, 4 and 5. TP sensitivity to different WACC rates and target EV/EBITDA multiples are detailed in Figures 2, 3 and 8.

Financial Exhibits

Valuation And Recommendation

Our DCF based valuation suggests that the stock is priced to perfection

We value MAHB’s equity shares using a DCF approach and our valuation estimate of MYR6.80 per share suggests that the shares are priced to perfection. We value its Malaysia airport operations at MYR7,691m (MYR4.64 per share) and its Turkey operations at MYR3,596m or MYR2.17 per share (EUR780m converted to MYR using MYR/EUR exchange rate of 4.61). We employed a WACC of 8%, which is based on a stock beta of 1, a risk-free rate of 3.75%, a market risk premium of 6% and a target gearing of 40%.

EV/EBITDA-based valuation also implies a similar value As corroboration, we also valued MAHB using a target EV/EBITDA multiple for the two business operations and arrived at a similar value of MYR6.84 per share. For its Malaysian airport operations, we ascribed a 20% discount to peer valuations, given its weak EBITDA margins (30% vs 60% for peers) and lower EBITDA growth (flat vs 2.7% for Airports of Thailand) compared to its Asian peers. For MAHB’s Turkey operations, we ascribe a premium of 10% to TAV Havalimanlari’s (TAV) EV/EBITDA valuation estimate given MAHB’s longer concession period, strong EBITDA growth outlook and superior EBITDA margins. TAV is the operator of Ataturk International Airport (Ataturk), Istanbul’s second international airport. TAV’s concession for Ataturk airport is expected to expire in early 2020, while we estimate MAHB’s concession to operate Istanbul Sabiha Gokcen International Airport (ISG) to only expire in 2034 (Figure 5) Assessed value implies close to historic average EV/EBITDA valuation Our assessed value of MYR6.80 for MAHB, implies an EV/EBITDA of 9.7x, which lies between the average and +1SD from its one-year forward EV/EBITDA (Figure 7).

Source: RHB Research - 8 Apr 2016