Multiple catalysts in sight for MAHB, says CIMB Research

MAHB

KUALA LUMPUR: CIMB Equities Research has upgraded Malaysian Airports Holdings Bhd (MAHB) with an “add” rating and a higher target price of RM8.40.

“We believe that the share price weakness over the past three months has already taken into account the disappointment arising from the decision by the Malaysian Aviation Commission (MAVCOM) to leave weighted average passenger services charges (PSC) more or less unchanged relative to what MAHB has been accruing since February 2014,” CIMB said in a report. 

Moving forward, CIMB believed that the strong capacity additions by airlines and strong Chinese inbound travel will drive MAHB passenger traffic growth to more than 9% year-on-year in FY17 forecast.

“Also, we believe the probability is high that MAVCOM will permit an increase in landing charges from Feb 1, 2018. 

“Furthermore, any breakthrough in concession extension and user fee rate negotiations will add more value to our DCF-based target price, which does not yet take these two potential positives into account,” it said. 

The research house said without taking into account potential concession extension, it valued the MAHB group at RM6.42 per share, with the DCF of the Malaysian operations up to 2034F at RM5.40 per share and the DCF of the ISG concession up to 2030F at RM1.02 per share.

The current share price is very close to this valuation.

“By factoring in only half of the DCF value of the concession extension to 2069F, our DCF of the Malaysian operations rises to RM7.37 per share, taking the MAHB target price to RM8.40 per share after including the valuation of ISG. 

“We have factored in only half of the DCF value of the potential extension as we are unsure what terms and conditions may be changed, if any,” CIMB said. 

It added that its target price has upside if the terms of the concession (both existing and for the extension period) turn out better than expected.

On Oct 31, 2016, MAVCOM announced a new set of PSC tariffs that took effect from Jan 1, 2017. 

CIMB expressed that it was disappointed by the decision as it failed to provide an increase in the overall weighted average tariff that it believed was sorely needed to boost MAHB’s poor ROEs post the commissioning of klia2 in May 2014.  

“This explained why MAHB’s share price weakened during 4Q16, in our view. Putting this aside, we believe that there are other powerful catalysts that will move the share price,” it added. 

CIMB believed airline capacity expansion should be robust in FY17F, with many airlines planning for fleet growth, which will drive seat capacity growth and lower ticket pricing, potentially stimulating traffic. 

CIMB noted that MAHB has been negotiating with the Ministry of Finance for several years on the extension of its Malaysian concession. 

The concession was set for 25 years from 2009 to 2034 but MAHB is negotiating for a further 35-year extension to 2069. 

“MAHB’s current share price reflects none of the valuation upside that might arise with the extension of the concession, in our view. 

“Hence, we believe a successful extension represents pure upside to MAHB’s valuation and stock price from current levels,” it explained. 

Assuming that the Malaysian concession is not extended, CIMB thinks that  MAHB is worth RM6.42 per share, which is higher than the current share price. 

As such, CIMB said there was limited downside; conversely, there is at least 34% upside to its target price.