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PP 7767/09/2011(028730)

22 October 2010

Malaysia
RHB Research
Corporate Highlights Institute Sdn Bhd
A member of the
RHB Banking Group
Company No: 233327 -M

MARKET DATELINE
V is it Note
22 October 2010

Malaysia Airports Share Price


Fair Value
:
:
RM5.97
RM6.81
Sabiha-Gokcen For Long-Term Prospects Recom : Outperform
(Maintained)

Table 1 : Investment Statistics (MAHB; Code: 5014) Bloomberg: MAHB MK


Net Net
FYE Turnove Profit EPS Growth PER C.EPS* P/NTA ROE Gearing GDY
Dec (RMm) (RMm) (sen) (%) (x) (sen) (x) (%) (%) (%)
2009 1,637.1 378.3 34.4 23.8 17.4 - 4.1 23.5 0.1 2.5
2010F 1,822.7 329.4 29.9 (12.9) 19.9 33.0 3.6 18.0 0.2 2.5
2011F 2,001.4 409.8 37.3 24.4 16.0 38.0 3.1 19.6 0.4 3.1
2012F 2,159.2 495.5 45.0 20.9 13.3 38.0 2.7 20.7 0.6 3.8
Main Market Listing /Trustee Stock/Non-Syariah Approved Stock By The SC * Consensus Based On IBES

♦ Looking at longer-term prospects. In the near term, Sabiha Gokcen


Issued Capital (m shares) 1,100.0
International Airport (SGIA) will not significantly contribute to MAHB’s
Market Cap(RMm) 6,567.0
earnings as it expects a seven to eight years gestation period. Nonetheless,
Daily Trading Vol (m shs) 11.9
management is optimistic in the long-term terminal given its high growth 52wk Price Range (RM) 3.51 – 5.99
potential. Major Shareholders: (%)
♦ One airport’s loss is another airport’s gain. While Ataturk International Khazanah Nasional 60.0
Airport (AIA) is considered to be the main airport of Istanbul, the terminal is
facing capacity constraints and is estimated to have exceeded capacity by
40%. In addition, we note that constraints are exacerbated by the lack of FYE Dec FY10 FY11 FY12
space surrounding the terminal. Therefore, we believe this provides SGIA EPS Revision (%) - - -
with the opportunity to capture AIA’s passenger spillovers. Var to Cons (%) (9.3) (2.0) 18.5

♦ Geographical advantages. In the same vein, we note that the Asian side PE Band Chart

of Istanbul is located in the industrial and residential areas i.e. Bursa,


Gebze, Izmit, Sakarya, Yalova and the Istanbul Anatolian side. The areas PER = 20x
PER = 15x
are estimated to have a 20m population contrary to AIA’s area which only PER = 10x

caters to around 3% of the Istanbul’s total population. In addition, despite


AIA’s distance being closer to city centre vis-à-vis SGIA, we highlight that
the route to and fro AIA is typically congested. We believe this would give
SGIA advantage relative to airport choice.

♦ Incorporating KLIA 2 and SGIA into our fair value. We are taking the Relative Performance To FBM KLCI
opportunity to incorporate the KLIA 2 and SGIA projects into our fair value.
For the KLIA 2 project, we have assumed a project internal rate of return
(IRR) of 8.0%, which implies an equity IRR 17.9%. Discounting back the
MAHB
projected cashflow at 10%, we estimate that MAHB will yield an
enhancement of RM716.3m, translating to 65.1 sen per share. On the other
hand, for the SGIA project, we have assumed a project IRR of 10.0%,
FBM KLCI
translating to equity IRR 24.4%, by discounting back the projected cashflow
at 10%, we estimate that the investment will yield an enhancement of
RM213.7m based on its 20% stake, translating to 19.4 sen per share.
♦ Earnings forecasts. Maintained.
♦ Risks. These include: (1) Regulatory risks, particularly, inability to raise
airport charges; and (2) Traffic risk on economic downturn and outbreak of Joshua CY Ng
pandemic diseases. (603) 92802151
joshuang@rhb.com.my
♦ Investment Case. Following our incorporation of KLIA 2 and SGIA
projects, our indicative fair value is raised from RM5.96 to RM6.81 based on
“sum of parts”. Maintain Outperform.

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Key Takeaways

♦ Brief recap. A consortium consisting of Limak Holdings (LIMAK), GMR Infrastructure Limited (GMR), and MAHB
had acquired the concession right to operate and manage Sabiha Gokcen International Airport (SGIA). The
terminal commenced operations in Nov 2009.

♦ Highlights. Key takeaways during our recent visit to Sabiha Gocken International Airport (SGIA) are:
1. In the near term, SGIA will not significantly contribute to MAHB’s earnings as it expects a period of
gestation of seven to eight years. Nonetheless, management is optimistic in the long-term terminal given
its high growth potential.
2. SGIA is poised to register strong traffic growth going forward mainly due to: 1) Spillovers of capacity
constraints in Ataturk International Airport (AIA) in tandem with growing passenger traffic; 2)
Geographical advantages (areas adjacent are mainly industrial and residential areas with estimated 20m
population); and 3) Increasing connectivity by fast-growing airlines i.e. Pegasus Airlines, Anadolu Jet and
SunExpress (Turkish Airlines-Lufthansa). Already, SGIA was Euro’s fastest growing airport in 2002-2008.

Table 2: Details Of Sabiha Gokcen International Airport

1. Concession period 20 years (until 2028)

2. Concession fee EUR1.9bn to be paid in 20 years, with no fee payable within the first three years

3. Project costs EUR450.8m

4. Finance Equity EUR115.0m (25%), Debt EUR336.0m (75%)

5. MAHB’s equity EUR22.97m/RM114.9

6. MAHB’s stake 20% (GMR 40% and Limak 40%)

7. Operational rights Terminal buildings, car parks, ground handling, cargo, aircraft refueling operations, construction
of the operation of the new terminal building, hotel and etc

Source: Company

♦ One for the future. According to management, SGIA will not significantly contribute to MAHB earnings in the
short term as it expects a seven to eight years’ gestation period. However, management is optimistic on the
development of SGIA given its high growth potential. While currently only 20% of passenger traffic in Istanbul is
from SGIA, management expects this to increase to 45% within the next couple of years.

Chart 1: Total Passenger Traffic Forecast, SGIA

35
30
25
20
15
10
5
0
2008 2009 2010f 2011f 2012f 2013f 2014f 2015f 2016f

Source: Company

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♦ One airport’s loss is another airport’s gain. Currently, there are two airports in Istanbul, SGIA and Ataturk
International Airport (AIA) of which SGIA rests on the Asian side while AIA is located in the European side. While
currently AIA is considered to be the main airport of Istanbul, AIA is facing capacity constraints and is estimated
to have exceeded capacity by 40%. Also, we note that constraints are further exacerbated by the lack of space
surrounding the terminal. Therefore, we believe this provides SGIA with the opportunity to capture AIA’s spillover
passengers. Already, it has shown significant increase in passenger numbers i.e. Jan-Sep 2010 registered 88.8%
yoy growth of total passenger number (see Chart 6). In addition, SGIA is expected to handle a capacity of 35-
40m towards the end of the concession period.

Chart 2: Domestic Passenger Traffic, SGIA Chart 3: Domestic Passenger Traffic, AIA

5,000,000 300.0% 14,000,000 25.0%


4,500,000 12,000,000
250.0% 20.0%
4,000,000
10,000,000
3,500,000 15.0%
200.0%
3,000,000 8,000,000
2,500,000 150.0% 10.0%
6,000,000
2,000,000
100.0% 5.0%
1,500,000 4,000,000
1,000,000 0.0%
50.0% 2,000,000
500,000
- 0.0% - -5.0%
2006 2007 2008 2009 2006 2007 2008 2009

Domestic Yo Y
Do mestic Yo Y

Chart 4: International Passenger Traffic, SGIA Chart 5: International Passenger Traffic, AIA

2,500,000 120.0% 20,000,000 30.0%


18,000,000
2,000,000 100.0% 16,000,000 25.0%

80.0% 14,000,000 20.0%


1,500,000 12,000,000
60.0% 10,000,000 15.0%
1,000,000 8,000,000
40.0% 10.0%
6,000,000
500,000 20.0% 4,000,000 5.0%
2,000,000
- 0.0% - 0.0%
2004 2005 2006 2007 2008 2009 2004 2005 2006 2007 2008 2009

Internatio nal Yo Y Internatio nal Yo Y

Source: DHMI

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Chart 6: Total Passenger Traffic Jan-Sep 2010, SGIA Chart 7: Number Of Flight Destinations, SGIA

Domestic International 66
8,583,397
52
88.8%

4,545,224 26 27
19
9

2008 2009 2010*


2009* 2010*

*Jan-Sep
Source: Company

♦ Geographical advantages. In the same vein, we note that the Asian side of Istanbul is located in the industrial
and residential areas i.e. Bursa, Gebze, Izmit, Sakarya, Yalova and the Istanbul Anatolian side. The areas are
estimated to have 20m population while AIA’s location caters to only around 3% of the Istanbul’s total
population. In addition, despite AIA’s distance being closer to city centre vis-à-vis SGIA, we highlight that the
route to and fro AIA is typically congested. We believe this would give SGIA advantage in relation to airport
choice.

Table 3: SGIA vs. AIA

SGIA AIA

1. Capacity 25m passenger capacity (capacity 30m passenger capacity (limited by space)
expansion to 35-40 passengers by 2028)

2. Location Pendik, Asian side Yesilkoy, European side

3. Distance from city centre 35km 24km


Source: Company

♦ SGIA the gateway for future prospects. Given the success in completing the terminal well within its expected
time of 18 months vs. estimated 24-30 months, we believe this could potentially boost MAHB’s reputation and
open to further opportunities going forward. Note currently there are about 50 terminals in Turkey which provides
MAHB with ample opportunities.

♦ Growing destinations on the back of low-cost carriers. SGIA is the hub for fast-growing low-cost carriers
i.e. Pegasus Airlines, Anadolu Jet and SunExpress. We believe the surge in passenger traffic is a testimony to the
growing demand for budget flights. Already, SGIA has increased its international destinations (see Chart 7).

♦ Incorporating KLIA 2 and SGIA into our fair value. We are taking the opportunity to incorporate the KLIA 2
and SGIA projects into our fair value.

1. For the KLIA 2 project, we have assumed a project internal rate of return (IRR) of 8.0%, which implies
an equity IRR 17.9% (based on 70:30 debt-to-equity, 5.0% costs of debt and 25% tax). Discounting
back the projected cashflow at 10%, we estimate that MAHB will yield an enhancement of RM716.3m,
translating to 65.1 sen per share.
2. On the other hand, for the SGIA project we have assumed a project IRR of 10.0%, translating to equity
IRR 24.4% (based on 75:25 debt-to-equity, 6.5% cost of debt and 20% tax), by discounting back the
projected cashflow at 10%, we estimate that the investment will yield an enhancement of RM213.7m
based on its 20% stake, translating to 19.4 sen per share.

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Image 1: SGIA Terminal Image 2: Outlets

Image 3: Departure Gate Image 4: Check-In Counters

♦ Risks to our view. These include: (1) Regulatory risks, particularly, inability to raise airport charges; and (2)
Traffic risk on economic downturn and outbreak of pandemic diseases.

Earnings Forecasts

♦ Forecast. Maintained.

Valuation and Recommendation

♦ Investment Case. Following the incorporation of KLIA 2 and SGIA projects, our indicative fair value is raised from
RM5.96 to RM6.81 based on “sum of parts” (see Table 4). We are positive on MAHB as: 1) It is an excellent proxy
to the booming air travel sector in the region; and 2) It allows investors to piggy-back on Air Asia’s air passenger
growth. Maintain Outperform.

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Table 4: Sum-Of-Parts Valuation

Segment RMm RM/share Basis

Malaysian Operations (ex. KLIA 2 and 6,556.8 5.96 16x FY11 EPS of 37.3sens
SGIA)

KLIA 2 716.3 0.65 Enhancement based on project value of RM2.5bn, project IRR of
8.0%, tax rate 25%, discount rate of 10% and costs of debt of 5.0%

SGIA 213.7 0.19 Enhancement base on project value of RM2.2bn, project IRR of 10,
tax rate of 20%, discount rate of 10% and costs of debt 6.5%.

Total 7,486.8 6.81

Table 5: Earnings Forecasts Table 6: Forecast Assumptions


FYE Dec (RMm) FY09a FY10f FY11f FY12f FYE Dec FY10f FY11f FY12f
Revenue 1,637.1 1,822.7 2,001.4 2,159.2 Passenger volume (m)
Growth (%) 14.1 11.3 9.8 7.9 International 27.0 29.9 32.0
Domestic 31.0 33.3 35.8
EBITDA 642.5 726.0 792.9 852.8
EBITDA margin (%) 39.2 39.8 39.6 39.5 PSC ex-KLIA
- International (RM) 51 51 51
Depreciation &
- Domestic (RM)
amortisation (150.5) (162.8) (172.1) (180.9) 9 9 9
EBIT 492.0 563.2 620.9 671.8
EBIT margin (%) 30.1 30.9 31.0 31.1 PSC at LCCT
- International (RM) 25 25 25
Finance costs (14.2) (16.9) (9.1) (0.4) - Domestic (RM) 6 6 6
JV 0.0 0.0 0.0 0.0 Source: Company data, RHBRI estimates
Associate 2.6 (80.0) (60.0) (20.0)
Pretax profit 480.4 466.3 551.8 651.4
Pretax margin (%) 29.3 25.6 27.6 30.2

Tax expense (100.2) (136.6) (140.7) (154.4)


Profit from continuing
operations 380.3 329.7 411.1 497.0
Discontinued
operations (1.4) 0.0 0.0 0.0
Minority interests (0.7) (0.3) (1.2) (1.5)

Net profit 378.3 329.4 409.8 495.5


Net profit margin (%) 23.1 18.1 20.5 22.9

Source: Company data, RHBRI estimates

IMPORTANT DISCLOSURES

This report has been prepared by RHB Research Institute Sdn Bhd (RHBRI) and is for private circulation only to clients of RHBRI and RHB Investment Bank Berhad
(previously known as RHB Sakura Merchant Bankers Berhad). It is for distribution only under such circumstances as may be permitted by applicable law. The opinions
and information contained herein are based on generally available data believed to be reliable and are subject to change without notice, and may differ or be contrary to
opinions expressed by other business units within the RHB Group as a result of using different assumptions and criteria. This report is not to be construed as an offer,
invitation or solicitation to buy or sell the securities covered herein. RHBRI does not warrant the accuracy of anything stated herein in any manner whatsoever and no
reliance upon such statement by anyone shall give rise to any claim whatsoever against RHBRI. RHBRI and/or its associated persons may from time to time have an
interest in the securities mentioned by this report.

This report does not provide individually tailored investment advice. It has been prepared without regard to the individual financial circumstances and objectives of
persons who receive it. The securities discussed in this report may not be suitable for all investors. RHBRI recommends that investors independently evaluate particular
investments and strategies, and encourages investors to seek the advice of a financial adviser. The appropriateness of a particular investment or strategy will depend
on an investor’s individual circumstances and objectives. Neither RHBRI, RHB Group nor any of its affiliates, employees or agents accepts any liability for any loss or
damage arising out of the use of all or any part of this report.

RHBRI and the Connected Persons (the “RHB Group”) are engaged in securities trading, securities brokerage, banking and financing activities as well as providing
investment banking and financial advisory services. In the ordinary course of its trading, brokerage, banking and financing activities, any member of the RHB Group
may at any time hold positions, and may trade or otherwise effect transactions, for its own account or the accounts of customers, in debt or equity securities or loans of
any company that may be involved in this transaction.

“Connected Persons” means any holding company of RHBRI, the subsidiaries and subsidiary undertaking of such a holding company and the respective directors,
officers, employees and agents of each of them. Investors should assume that the “Connected Persons” are seeking or will seek investment banking or other services
from the companies in which the securities have been discussed/covered by RHBRI in this report or in RHBRI’s previous reports.

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This report has been prepared by the research personnel of RHBRI. Facts and views presented in this report have not been reviewed by, and may not reflect
information known to, professionals in other business areas of the “Connected Persons,” including investment banking personnel.

The research analysts, economists or research associates principally responsible for the preparation of this research report have received compensation based upon
various factors, including quality of research, investor client feedback, stock picking, competitive factors and firm revenues.

The recommendation framework for stocks and sectors are as follows : -

Stock Ratings

Outperform = The stock return is expected to exceed the FBM KLCI benchmark by greater than five percentage points over the next 6-12 months.

Trading Buy = Short-term positive development on the stock that could lead to a re-rating in the share price and translate into an absolute return of 15% or more over
a period of three months, but fundamentals are not strong enough to warrant an Outperform call. It is generally for investors who are willing to take on higher risks.

Market Perform = The stock return is expected to be in line with the FBM KLCI benchmark (+/- five percentage points) over the next 6-12 months.

Underperform = The stock return is expected to underperform the FBM KLCI benchmark by more than five percentage points over the next 6-12 months.

Industry/Sector Ratings

Overweight = Industry expected to outperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Neutral = Industry expected to perform in line with the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Underweight = Industry expected to underperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

RHBRI is a participant of the CMDF-Bursa Research Scheme and will receive compensation for the participation. Additional information on recommended securities,
subject to the duties of confidentiality, will be made available upon request.

This report may not be reproduced or redistributed, in whole or in part, without the written permission of RHBRI and RHBRI accepts no liability whatsoever for the
actions of third parties in this respect.

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