31 May 2018
Malaysia Airports Holdings Bhd (May 30, RM8.30)
Upgrade to hold with a higher target price (TP) of RM8.25: Malaysia Airports Holdings Bhd’s (MAHB) first quarter of financial year 2018 (1QFY18) core net profit of RM198 million was double that of last year’s, as Malaysia’s passenger (pax) traffic grew 3.3% year-on-year (y-o-y) (with international traffic up 10.5% although domestic traffic fell 4%) and Istanbul Sabiha Gokcen International Airport’s (ISG) pax traffic recovered sharply from last year’s low base (+19% y-o-y growth).
MAHB’s 11% y-o-y rise in 1QFY18 revenue also came from growth in Eraman’s duty-free sales, and an increase in royalties from klia2’s top-performing tenants. The effective tax rate for Malaysia also declined from 1QFY17’s 26% to 1QFY18’s 15%.
Malaysia’s earnings before interest, taxes, depreciation and amortisation margin rose from 1QFY17’s 33% to 1QFY18’s 36% due to 11% y-o-y higher revenue, but also because opex rose only 5%. Historically, Malaysia’s maintenance and staff costs tend to be at their lowest in the 1Q of every year; hence, we expect both cost items to rise sequentially in subsequent quarters. We also expect Malaysia’s effective tax rate to normalise to the corporate tax rate of 24%, all else being equal.
As a result, we caution against annualising Malaysia’s 1QFY18 core net profit to derive full-year earnings.
We have raised our financial year 2018 forecast (FY18F) group core net profit forecast from RM554 million to RM684 million, or an increase of RM130 million, with each half coming from increases in Malaysia’s and ISG’s forecasts.
Malaysia’s forecasts have been raised mainly on account of the higher-than-expected growth in klia2’s commercial and royalty share from its top-performing tenants, due to the robust traffic growth at klia2. ISG’s numbers have been raised from losses to a roughly-breakeven position as we raise our traffic growth forecast from 7% to 15%.
MAHB is a beneficiary of the change in Malaysia’s government on May 10, 2018, as the political risks for the company’s Malaysia business have dissipated. One of the risks involved several airlines’ lobby to operate from new, third-party airports that may or may not be owned by MAHB.
Another risk involved MAHB’s inability to collect a full RM73 per pax in passenger service charge (PSC) from klia2-based airlines that fly outside of Asean; this rate was effective Feb 1 2018 but MAHB only accrued RM50 per pax as PSC revenue.
We believe that the new government would want to minimise unnecessary capital expenditure for Malaysia as a whole, and it is unlikely to permit the construction of new airports that would make redundant the existing infrastructure owned by MAHB, which is government-linked.
Also, with the new government likely unwilling to pay MAHB subsidies for PSCs, it will most probably give the go-ahead for MAHB to raise klia2’s non-Asean PSC to RM73 per pax, from the old rate of RM50 per pax, by June or July 2018 forecast, in MAHB’s expectation.
The key downside risk is whether the government can afford to pay the marginal cost support in PSC for amounts owed since 2016. Key upside risk is higher-than-expected pax traffic growth. The Malaysian Aviation Commission will reveal the parameters of the Regulatory Asset Base framework for Malaysia in 3QFY18 forecast, upon which we will revisit our forecasts. — CGSCIMB Research, May 29