Review

• Malaysia Airports’ (MAHB) 1H19 core profit of RM309.3mn came in within our expectations at 53% of our full-year forecast but above consensus estimates (57% of full-year estimates). For this quarter, the company declared a first interim dividend of 5sen/share, same as 2Q18.

• 1H19 core profit jumped 29.1% YoY to RM309.3mn underpinned by revenue expansion (+9.2%), lower finance cost (-3.3%) and tax expense (- 16.3%). The increase in revenue was spurred by scheduled hike in PSC in Feb-19, along with a 4.9% rise in passenger movements in Malaysia, which more than offset declines in duty-free sales and rental income at KLIA and KLIA 2. Also, the sharp increase in international passenger movements at ISG during 1H19 (+20.8%) also contributed to strong 1H19 earnings too.

• According to management, the decline in duty-free sales was due to tight custom enforcement in Malaysia and China, discouraging passengers from purchasing more controlled duty-free items. Eraman (duty-free) sales declined 1.8% YoY to RM344.5mn with a lower average spending RM11.34 per pax (-3.8%). Meanwhile, the drop in F&B rental and royalty income was due to commercial reset exercise, where the net lettable space at KLIA reduced by 9.1% to 14,981sqm.

• ISG’s 1H19 results performance was commendable with 1H19 profit turned to EUR7.4mn versus EUR6.5mn loss a year ago, resulting from: 1) increase in airport tax (+EUR3), 2) introduction of passenger security service charges (+EUR3); and 3) 20.8% increase in international passenger movements.

Impact

• No change to our FY19-21 earnings projections.

Briefing Highlights

• Last week, the Ministry of Transport announced a reduction in airport tax for passengers using KLIA to destinations beyond ASEAN from RM73 to RM50. According to management, this will not have a significant impact on MAHB’s bottomeline as the difference between the new PSC and benchmark PSC (i.e.: RM80) will be subsidised or compensated by the government.

• However, this surprised announcement could be an ominous indication that the new PSC structure under the new regulatory asset base framework, which will be announced in Oct, may not be favourable after all. We believe there is mounting pressure on the government that the departure tax and new PSC are too “taxing” to the passengers.

• The introduction of departure tax is to help government’s financials by increasing tax collections. As such, it does not make any sense by subsidising the passengers by reducing airport tax and compensating MAHB later on. In our opinion, the latest move of reducing airport tax suggests that the impending operating agreement (OA) between MAHB and the government could have new terms that would help to contain government future subsidies, which could be at the expense of MAHB. Note that in Apr-2019, the government announced the operating agreement extension for MAHB to manage 39 airports within Malaysia for 35 years until 2069. However, the final terms for the new OA are still pending.

Valuation

• Given the diverse interests of MAHB, the government, airline companies and the public, we would not hold our breath that the new PSC framework and OA would be favourable to MAHB. As such, we continue to advise investor to wait for the final PSC and OA outcome before investing in the stock. Maintain Sell on MAHB with unchanged DCFvaluation of RM8.47/share.

FCFE

Source: TA Research - 3 Sept 2019