MAHB : Maintain BUY at RM6.07 with TP of RM7.12

All goes well for Malaysia Airports

Malaysia Airports Holdings Bhd
(Nov 1, RM6.07)
Maintain “buy” at RM6.07 with target price of RM7.12: The RM275 million (+15.7%) 9M10 recurring net income was 64% of our full-year forecast and 74% of consensus. The fourth quarter is seasonally the strongest, and assuming 3Q momentum is replicated, MAHB should have no problem hitting our RM152 million (10% y-o-y) 4Q2010 forecast.

MAHB is our top aviation pick as it is well-placed to enjoy the current air travel up-cycle. Buy, with RM7.12 per share discounted cash flow-based (DCF) target price (TP).

The RM95 million (+12% y-o-y, 5% q-o-q) 3Q recurring net profit was in line with our RM101 million expectation. The main variance was a higher 32% tax rate (we forecast the statutory 25%) which added RM3 million in costs.

We tweak our forecasts on post-result housekeeping and TP is maintained.

The bulk of the 7.5% y-o-y 3Q passenger traffic growth was from international passengers (19.1% y-o-y). Domestic passengers grew a slower 3% y-o-y.

This has increased the average passenger service charges (PSC) by 6.6% y-o-y as international passengers command four to seven times higher PSC than domestic passengers.

We were surprised to see that MAHB’s cash flow is already experiencing the burden of the KLIA 2 construction with a cash outflow of RM145 million in 3Q2010. We initially thought it would hit in a big way only in 2011/12.

However, MAHB’s strong balance sheet of RM1.2 billion of gross cash would allow it to navigate this “cash flow heavy” period with little fuss.

We have tweaked our FY2010 numbers by +0.2% to reflect the higher tax rate and adjustments of other variables. The fourth quarter is looking very promising, with continued strong passenger growth, higher international passenger mix and robust retail spend.

Industry experts predict this strong air travel is likely to carry over into 2011 which may make our 2011 forecast seem modest. We hold our forecast for now pending a company visit.

Revenue was up by 18.3% y-o-y, driven by a combination of 7.5% passenger growth, 10% higher unit revenue and 0.8% from higher price/mix.

The higher unit revenue was achieved from: (1) higher average PSC of RM9.47 (6.6% y-o-y) stemming from higher percentage of international passenger mix (3.6 ppt y-o-y); (2) retail sales per passenger rose to RM6.94 per passenger (8% y-o-y); and (3) higher landing charge of RM340 (2% y-o-y) due to bigger aircraft utilising MAHB’s airports.

FRS139 penalises MAHB on two fronts: (1) fair value of future cash stream from Sabiha Gochen, where the discount rate is high; and (2) mark-to-market adjustment of financial derivatives.

Both had negative implications to MAHB in 3Q2010, resulting in a net charge of RM32.9 million. We value MAHB on a cash flow basis and FRS139 adjustments have no implication on our valuations.

We retain our DCF valuation methodology with a target price of RM7.12. Our assumptions are: (i) a 10-year cash flow projection, (ii) a terminal yield of 0%, and (iii) weighted average cost of capital (WACC) of 8.83%.

MAHB’s 2010F valuation is compelling: Price/operating cash flow per share of 8.6 times is at a 25% discount to peer group average, return on capital of 11% is 51% higher, and dividend yield of 2.9% is 39% higher.

Furthermore, MAHB’s three-year collateralised fund obligation compounded annual growth rate is the second highest and gearing ratio of 0.15 times is significantly lower than peer group average of 0.93 times.

On a balanced scorecard basis (equal weighting for all five valuation metrics), MAHB is the most attractive listed airport in the world, followed by Xiamen, Shenzhen and Vienna — Maybank IB Research, Nov 1