Malaysia Airports Holdings - A good year ahead

AIRPORT is our top pick for the aviation sector in 1Q13 amid the intense competition between AIRASIA and Malindo. Despite the unfortunate event in Maldives, this will not derail AIRPORT’s earnings progress in the near term as its KLIA2 will start operation in May 2013.  Our recommendation is also premised on the flight-to-safety strategy of investing in the aviation sector currently as we believe that both AIRASIA and MAS are likely to undergo earnings compression due to the rising competition and the risk of low loads during their seasonally weak 1Q season. AIRPORT has a stable income, decent dividend yield of c.3% and a growing non-aeronautical income, which should buffer the impact of the uncertainties in the industry. We have an OUTPERFORM recommendation on AIRPORT with aTarget Price of RM6.42 based on SOP valuation.   

9M12 results were above our expectations but...  AIRPORT’s 9M12 results came in above our expectations due to the strong earnings contribution from its associate, especially from MALE airport. However, following the recent news on MALE airport, we deem the results to have come in only in line with our earlier expectations after we stripped out the MALE contribution from our earnings forecasts. To recap, AIRPORT holds a 23% interest in MALE airport and has invested up to RM22m (YTD). AIRPORT has also recognized c.RM42mcontributions from MALE. We are unsure if AIRPORT can recoup its investment, but it is likely that AIRPORT will make provision from the potential loss in FY12.   

Could there be more land development deals in 2013? To recap, AIRPORT’s next pillar of growth (based on its “Runway to Success” plan) from 2012 to 2014 will include utilising the land bank surrounding KLIA for various developments such as for a commercial centre (CBD-AIRPORT’s new office area), Free Zone, Leisure & recreational and agro tourism. Thus far, the plan to expand its retail capacity will be underway once KLIA2 starts operation in May-13. The recent MOU signed with Mitsui Fudosan bodes well for AIRPORT’s business plan for the next two to three years. The Mitsui Outlet Park KLIA project will require 50 acres of land with a gross development cost of about RM335.0m. This makes up about 20% of our assumption of the land size to be developed in 2013.     

Regional expansion. Based on the recent news of its overseas expansion plan, including Stansted Airport, China and Indonesia, we are not entirely optimistic on this move as we believe that AIRPORT  will likely need to prioritise its financial resources to the KLIA land development. Hence, we expect AIRPORT is likely to have only a small equity exposure if it proceeds with the overseas expansions above. Based on its track records, AIRPORT will likely choose to acquire a semi-matured airport with a minimal exposure i.e. earning management fees with an associate level equity holding.   

We have an OUTPERFROM recommendation on AIRPORT with a Target Price of RM6.42 based on SOP valuation. We have already excluded MALE’s profit contribution from our FY12E  and FY13E earnings forecasts.

Source: Kenanga