Aerotropolis Still A Long Way To Go SELL. Last Traded: RM8.84

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1 C O M P A N Y U P D A T E Tuesday, March 27, 2018 FBMKLCI: 1, Sector: Transportation THIS REPORT IS STRICTLY FOR INTERNAL CIRCULATION ONLY* Malaysia Airports Holdings Berhad TP: RM8.61 (-2.6%) Aerotropolis Still A Long Way To Go Last Traded: RM8.84 SELL Tan Kam Meng, CFA Tel: kmtan@ta.com.my We have never had a moment of doubt that Aerotropolis (also known as Aeropolis in Malaysia) is an airport city model that we want for our future. After knowing the bigger picture behind all mega Aerotropolis projects from industry experts in a 3-day conference held in Kuala Lumpur last week, we are reaffirmed that MAHB s KLIA Aeropolis project is so important to our national development blueprint, in terms of economic growth, job creation and standard of living. However, we are always faced with a conundrum when come to stock valuation as the real direct benefits of Aerotropolis to MAHB, in terms of profit and shareholders return, are still unclear. Also, the risks involved, from project execution, source of fund, change in regulation and policy, to finding suitable catalyst projects, are simply too big to ignore. Last but not least, the diverse interest of stakeholders, i.e.: government, employees, citizens, shareholders, airline operators, foreign partners and investors, is a major concern for us, which may derail the development process. 3 rd Annual Aerotropolis, Kuala Lumpur This 3-days conference held in Kuala Lumpur last week attracted participants from different countries such as USA, UAE, UK, Hong Kong, Australia, Singapore, South Africa, Finland, Germany and the Philippines. It offered not only in-depth analysis and case studies but also some eye-popping photos and videos by 19 distinguished speakers about different Aerotropolis models in different countries. Key learning objectives for us are: Is Aerotropolis truly a future airport model; Key considerations in feasibility studies; Catalyst projects or lead initiatives; Funding hurdles and other risk factors; Project return. Is Aerotropolis truly a future airport model The first impression we had about Aerotropolis is that it is extremely expensive to have one. It requires massive landbank and multi-billion dollar infrastructure investments and involves various stakeholders with different areas of interest. However, as rightly pointed out by speakers Ms. Ame Engelhart, Mr. Joshua Bingcang and Mr. Cosmos Hamadziripi that Aerotropolis is a solution to Hong Kong and is also feasible in Manila and South Africa to address the overcrowding issue caused by urbanisation and rampant economic growth. It will also create a lot of job opportunities, which are significant to poverty eradication in South Africa. Share Information Bloomberg Code MAHB MK Stock Code 5014 Listing Main Market Share Cap (mn) Market Cap (RMmn) Par Value wk Hi/Lo (RM) 9.45/ mth Avg Daily Vol ('000 shrs) Estimated Free Float (%) 56.6 Beta 1.1 Major Shareholders (%) Khazanah EPF Forecast Revision FY18 FY19 Forecast Revision (%) Net profit (RMm) Consensus TA's / Consensus (%) Previous Rating Sell (Maintained) Financial Indicators FY18 FY19 Net Gearing (%) CFPs (sen) P/CFPS (x) ROE (%) NTA/Share (RM) (4.5) (4.1) Price/NTA (x) nm nm Share Performance (%) Price Change MAHB FBM KLCI 1 mth 0.6 (0.6) 3 mth mth mth (12-Mth) Share Price relative to the FBMKLCI Source: Bloomberg Page 1 of 5

2 A case study about the closure of a city airport in Kai Tak, Hong Kong and the relocation to Chak Lap Kok have helped to solve the capacity constraint faced by the airport. More importantly, it has been proven as a successful model to improve the quality and standard of living and also supportive to other economic stimulus and city development in Hong Kong. In Manila, similar problems are now faced by Ninoy Aquino International Airport, where the overcrowding problem has crimped airport capacity, which then sprawled into a serious national issue that affects the daily life of citizens. The metro Manila is in dire need of an Aerotropolis program where the government has approved the development of New Sangley International Airport and Clark International Airport. 27-Mar-18 Key considerations in feasibility studies Drafting a master plan for Aerotropolis was no easy task. There are a couple of rules to follow when considering the infrastructure requirement and future lead projects. First, no projects are allowed to put airport operations in jeopardy. Second, never sell development land within Aerotropolis to rein in land usage. Third, there must be regulation or policy flexibility that tailors to the special needs within the Aerotropolis, which are different from other national development projects. Like any other typical mega projects where the initial planning stage is crucial to identify various stakeholders and their responsibilities, setting project milestones and goals, analysing resource and manpower strength, outlining issues or foreseeable project risks. For Aerotropolis, the project design must embrace the constant change in needs of various stakeholders and must build in as much scalability and flexibility as possible into the model. For instance, the design of Aerotropolis must be adaptive to internet of things applications and Industry 4.0 now for ecommerce and logistics business opportunities and prepare for self-driving technology in the future. At the same time, it must be able to tackle future issues related to environmental concerns as well. Catalyst projects or lead initiatives Catalyst projects are important components within the development of Aerotropolis. However, suffice it to say that there is no one-fits-all catalyst project for different Aerotropolis programs in the world. It vastly depends on the types of catchment, the availability of resources and human capital, skill and education, and regulations in a typical country. Due to the complexity and the far-reaching impact on the economy, catalyst projects are always considered as parts of national development blueprint of a country. Accessibility is a critical success factor to all catalyst projects and Aerotropolis. As such, infrastructure projects such as highway and transit are inevitable. However, the main hurdle to this is always about the project financing. Funding hurdles and other risk factors In the conference, one of the successful Aerotropolis models introduced was the Aerotropolis Atlanta, Georgia. The speaker, Mr. Gerald Macdowell said that the funding for infrastructure development is mainly project grants under the national budget. In other words, it is taxpayers money to finance the infrastructure of Aerotropolis. Meanwhile, for any catalyst projects, privatepublic partnership is an option to fund the projects. However, some questions were raised during the Q&A session are government grants may not be available in certain countries, or the Aerotropolis project is not one of the priority projects in the country, thus Page 2 of 5

3 receiving little government grants. So, how should we deal with a situation like this? The simple answer is too bad, we can t help you. 27-Mar-18 Another hurdle to Aerotropolis is how to align the diverse interests among various stakeholders. In fact, one interesting question from a representative of an airline company has directly pinpointed to the cost escalation for doing business in Aerotropolis after massive amount of investment pouring into the infrastructure. The response was we need government regulations and tax policies, which are useful tools to even out the conflict of interest of different stakeholders. Return The return from a successful Aerotropolis is enormous and the stimulation effect on the economy can be very powerful. For instance, we understand that Aerotropolis Atlanta and Aerotropolis Denver are two of the 20 finalists for Amazon to choose its second headquarters. Aerotropolis Denver is also a home to Panasonic Enterprise Solution, which has helped to propel Denver into a smart city now, not to mention other stimulus like job creation and increase in living standard. The surge in population and economic activities, at the end, will bode well for airport operations. MAHB s Aeropolis The ground breaking ceremony for KLIA in 2003 and the opening in 2008 represent significant milestones in the initial phase of MAHB s Aeropolis program. In the subsequent phase, namely Runway to Success 2020, the company hopes to strengthen the core to be a main transit hub and expand and diversify its businesses. 3 core clusters have been identified for MAHB s Aeropolis, i.e.: 1) Air cargo and logistics; 2) Aerospace and Aviation; and 3) MICE and leisure. These catalyst projects are aligned with national development blueprint where government agencies such as Ministry of Transport, Ministry of International Trade and Industry, and Ministry of Tourism, are involved in the projects. In our opinion, Malaysia s Aeropolis has many similarities as other Aerotropolis models shared in the conference from investment perspective to risk and return. We believe MAHB s Aeropolis is at an executive stage where a significant development capex is required. Figure 1 below shows that KLIA Aeropolis masterplan consist of new infrastructure projects like: 1) proposed ERL extension line; 2) proposed KTM extension line; 3) proposed LRT/MRT line extension; 4) proposed BRT line; 5) proposed tram line; and 6) proposed high-speed rail line. As far as shareholders return is concerned, there is low visibility on direct benefits to MAHB in terms of passenger growth, increase in cargoes, and nonaeronautical revenue contribution in the near term. Also, there is uncertainty pertaining to revision of operating agreement in the future should the government liable for all the development expenditure in Aeropolis. Last but not least, the capital requirement to fully implement all catalyst projects may suggest that equity funding could be needed in the future. Valuation No change to our FY18-20 earnings forecast. We are of the opinion that Aeropolis is so important to our national development. However, there is still a long way to go for shareholders to see the real return. Maintain Sell on MAHB with unchanged DCF valuation of RM8.61/share, based on a discount rate of 10.7%. FCFE FCFE valuation Rf 3% Rm 9% Beta 1.28 CAP M 10.7% P V of future F CF E P erpectual S ukuk S hare outstanding (mn share) FCFE/share 8.61 Page 3 of 5

4 27-Mar-18 Figure 1 Infrastructure projects surrounding KLIA Aeropolis Source: MAHB & TA Research Page 4 of 5

5 27-Mar-18 Income Statement (RM'mn) Balance Sheet (RM'mn) FYE 31 Dec F 2019F 2020F FYE 31 Dec F 2018F 2019F 2020F Revenue PPE EBITDA Intangibles 17, , , , ,759.8 Dep & Amor (852.5) (880.8) (921.0) (993.8) (1019.7) Others 1, , , , ,351.1 EBIT Non-current Assets 18, , , , ,692.9 Net Financing Cost (689.8) (716.2) (710.3) (640.5) (601.4) Associate & JV EI (28.6) (51.4) Inventories PBT Trade Recb , ,145.9 Tax (110.2) (97.4) (49.2) (74.0) (143.0) Others PAT Cash 1, , , , ,445.6 Core Net Profit Current Assets 2, , , , ,816.6 Core EPS (sen) Total Assets 21, , , , ,509.5 EPS growth (%) > (4.6) 43.9 PE (x) Share Capital 1, , , , ,679.2 GDPS (sen) Share Premium 3, , , , ,455.1 Dividend yield (%) Others 1, , , , ,576.9 Retained Earnings 2, , , , ,066.8 Cash Flow (RM'mn) MI FYE 31 Dec F 2019F 2020F Total Equity 8, , , , ,778.0 PBT Dep & Amor Borrowings 5, , , , ,126.0 Changes in WC Other 5, , , , ,128.1 Others Non-current Liabilities 10, , , , ,254.2 CFO Borrowings , Capex (430.5) (418.4) (668.4) (418.4) (418.4) T. Payables and other 1, , , , ,477.3 Others Current Liabilites 1, , , , ,477.3 CFI (293.9) (157.7) (373.1) (418.4) (418.4) Total Liabilities 12, , , , ,731.5 Dividend (141.0) (215.7) (217.0) (167.9) (167.9) Equity raised NTA/share (RM) (5.1) (5.1) (4.5) (4.1) (3.6) Net Borrowing 0.0 (30.5) 0.0 (423.3) (1000.0) P/NTA (x) nm nm nm nm nm Others (1074.3) (777.0) (710.3) (640.5) (601.4) EV/EBITDAR (x) CFF (1215.3) (1023.2) (917.3) (1221.7) (1769.3) Ratios Net Increase/(Decrease) in Cash (479.2) FYE 31 Dec F 2018F 2019F 2020F FCFE Profitability FCF/share (RM) EBITDA margin (%) Core profit margin (%) Key Assumptions ROE (%) FYE 31 Dec F 2019F 2020F ROA (%) Total Passenger Growth (mn) Aircraft movement ('000) Liquidity Eraman Sales/ pax (RM) Current Ratio (x) Rental - KLIA & KLIA 2 (RM'mn) Quick Ratio (x) Stock Recommendation Guideline Leverage Net gearing (x) Net cash Interest Coverage (x) BUY : Total return within the next 12 months exceeds required rate of return by 5%-point. HOLD : Total return within the next 12 months exceeds required rate of return by between 0-5%-point. SELL : Total return is lower than the required rate of return. Not Rated: The company is not under coverage. The report is for information only. Total Return is defined as expected share price appreciation plus gross dividend over the next 12 months. Gross dividend is excluded from total return if dividend discount model valuation is used to avoid double counting. Required Rate of Return of 7% is defined as the yield for one-year Malaysian government treasury plus assumed equity risk premium. Disclaimer The information in this report has been obtained from sources believed to be reliable. Its accuracy and/ or completeness is not guaranteed and opinions are subject to change without notice. This report is for information only and not to be construed as a solicitation for contracts. We accept no liability for any direct or indirect loss arising from the use of this document. We, our associates, directors, employees may have an interest in the securities and/or companies mentioned herein. As of Tuesday, March 27, 2018, the analyst, Tan Kam Meng, who prepared this report, has interest in the following securities covered in this report: (a) nil Kaladher Govindan Head of Research TA SECURITIES HOLDINGS BERHAD (14948-M) A Participating Organisation of Bursa Malaysia Securities Berhad Menara TA One 22 Jalan P. Ramlee Kuala Lumpur Malaysia Tel: Fax: Page 5 of 5