Review

• Malaysia Airports’ (MAHB) 9M19 core profit of RM482.2mn was in line with our expectations but above consensus estimates at 74.2% and 85.4% of full-year forecast respectively.

• 9M19 core profit surged jumped 29.1% YoY to RM482.2mn underpinned by revenue expansion (+9.5%) and lower finance cost (-8.7%). The increase in revenue was driven by scheduled hike in PSC in Feb-19, along with a 5.7% rise in passenger movements in Malaysia, which more than offset declines in duty-free sales and rental income at KLIA and KLIA 2 (Figure 5-8). Also, the sharp increase in international passenger movements at ISG during 9M19 (+19.5%) and the introduction of passenger security charges, i.e.: EUR3, for all departure international passengers, have lifted ISG’s net profit higher to EUR21.4mn, which contributed positively to 9M19 earnings too.

• QoQ, 3Q19 core earnings was 28.7% higher at RM172.9mn. This was due to: 1) higher PSC collection for its Malaysia (4.7%) and Istanbul operations (22.0%), 2) increased rental income for both MAHB (8.9%) and ISG operations (18.2%). This more the offset: 1) weakness in retail sales (0.1%); 2) escalated staff costs and direct material costs; and 3) 6.1% increase in user free.

Impact

• No change to our FY19-21 earnings projections.

Briefing Highlights

• As we are now approximately one month away from the implementation of regulatory asset base (RAB) framework, whereby PSC is expected to rise to conform to an allowable pre-tax WACC of 10.88%, there is still no sight of government’s support for the final PSCs, which we believe have been made known to the government.

• Uncertainty is also seen in the new operating agreement (OA), which is expected to be signed by the government and MAHB next month. Our concern relates mostly to the user fee or share of profit to the government which could result in PSC to rise further.

• As RAB remains unclear, there is no firm guidance from management in terms of capex breakdown by project or year during regulatory period 1. However, the company would likely kick start with the overhaul of its baggage handling system and aerotrain systems next year with or without RAB implementation.

Valuation

• Maintain Sell on MAHB with unchanged DCF-valuation of RM8.58/share.

Source: TA Research - 28 Nov 2019