This article first appeared in The Edge Financial Daily on April 12, 2018 - April 18, 2018
Malaysia Airports Holdings Bhd
(April 11, RM9.12)
Maintain sell with a target price (TP) of RM8.61: The same trend was repeated in March 2018 where the strong growth in passenger movement in the international segment was partially offset by a decline in domestic passenger movement, causing Malaysia Airports Holdings Bhd (MAHB) to be stuck with low growth (less than 5%) for the past five months. MAHB’s March 2018 operating data indicates that the total passenger movement increased by 4% year-on-year (y-o-y) to 8.6 million passengers in March 2018, led by a 11.9% growth in the international segment, which offset a 3.5% y-o-y decline in the domestic segment. The commendable growth in the international segment came mainly from both the Asean (+10.5% y-o-y) and non-Asean sectors (+13.1% y-o-y).
Cumulatively, three months of 2018 (3M18) passenger movement expanded marginally to 3.4% from 3% a month ago. According to the announcement, despite the overall credible average load factor of 75.6% for the domestic sector, there was a significant reduction in domestic aircraft movement by some domestic airlines. AirAsia did contribute to an increase in seat capacity for the domestic sector but less than adequate to cover the reductions from other airlines. Overall, we consider first-quarter of 2018 (1Q18) passenger traffic within expectations and thus maintain our 2018 growth assumption of 3% versus management guidance of 6.3%.
Istanbul Sabiha Gökçen International Airport recorded a passenger growth of 15.2% y-o-y to 2.7 million passengers in March 2018. This was underpinned by the international and domestic segments where both grew by 15.2% y-o-y. Cumulatively, 3M18 passenger growth moderated to 18.6% from 20.5% in February 2018. We maintain our growth projection of 10% for 2018.
The key driver of MAHB’s share price performance in the second half of 2018 hinges largely on the outcome of the new tariff framework and regulations, which will be implemented gradually starting 2019. The central focus would be on: i) what are the qualifying capital expenditure and operational expenditure to regulated asset base calculation; ii) what is the implication on user fee charges (or government’s share of revenue); iii) regulatory cycle (three or five years) for each passenger service charge adjustment; iv) airport service quality and its effects on tariff; and v) the impact of all the above on MAHB’s capital structure and dividend policy.
We are of the opinion that the new framework would drive operating efficiency, thus benefiting MAHB’s future earnings. However, a supernormal growth in future earnings is highly unlikely as the group’s bottom line would be “regulated”. Earnings forecast is maintained.
We continue to believe MAHB is trading at an expensive forward price-earnings ratio of 56 times, given its small earnings base and tiny dividend yield. Maintain “sell” on MAHB with unchanged discounted cash flow valuation of RM8.61 per share, based on a discount rate of 10.7%. — TA Securities Research, April 11