Malaysia Airports BUY Target Price RM7.55 by Maybank IB Research

Maintain buy at RM6.50 with revised target price of RM7.55 (from RM7.12): MAHB will release its 2Q11 results tomorrow. The second quarter is seasonally the weakest for the year. Based on the operating statistics published, we expect a core net profit (less foreign exchange translation and all other non-cash items) of RM110.5 million (+24.5% year-on-year [y-o-y], -1.4% quarter-on-quarter [q-o-q]). We maintain our 'buy' call with a higher discounted cash flow-based target price of RM7.55, after imputing for a higher passenger growth of 10% in 2011 (previously 8%). Our new target price offers undemanding 15.2 times 2012 earnings.

For the first five months of 2011, passenger numbers were higher than expected, with a better mix profile. Growth was 13.3% y-o-y, substantially above management's guidance of 8% growth in 2011. Cargo was down by 2.6% y-o-y, which is in line with the global soft trend. International passengers make up 48.5% of total passengers, a 0.3 percentage point rise y-o-y. These factors will underpin strong profit growth as international passengers pay higher service charges.

KLIA continues to surprise positively by delivering an impressive 15.7% y-o-y passenger growth (5M 2010: +13.8% y-o-y). If KLIA can maintain this growth momentum for the remainder of the year, it will probably register traffic of 38 to 39 million passengers; thus making it the 25th to 27th busiest airport in the world ' up from 31st in 2010.

KLIA 2 may face another delay and we think it will be completed in 2013 as opposed to the guided 3Q11. This is not major and is expected for a project of this scale. The cash flow impact is small, but the depreciation charge of KLIA 2 will only commence in 2013 and thus impact our 2012/13 earnings.

We have tweaked numbers by +0.7%, +14% and -4.3% for 2011 to 2013 after imputing a higher passenger traffic growth and the new estimated KLIA 2 completion date. MAHB is trading at attractive levels compared with global peers: 10.1 times price-to-cash flow ratio (11% discount to peers), 8.9% return on capital (26% higher) and it is lowly geared at 0.39 times against a peer group average of 0.66 times. '