KLIA2 completion on track. According to the management, the completion of the upcoming Kuala Lumpur International Airport 2 (KLIA2) is on track and is scheduled to be operational by 1 May 2013. Currently 70%-complete, the major structures are in place while most of the roofing work is finished. From here on, the pace of completion for most of its interior fit-outs should progress quickly.
Revenue booster. KLIA2 is capable of handling up to 45m passengers and is expected to reach 50% capacity by the first year of operations. Come FY14, MAHB’s revenue is expected to further expand by 38% from the RM2.151bn it will register in 2012. A significant portion of the total will be derived from higher rental collected from KLIA2 as it will offer over four times the retail space at the existing LCCT. Although operation costs are expected to surge 32%, we expect the incremental flow to EBITDA to be immense, with EBITDA growing by 46% from RM840m in 2012 to RM1.23bn in FY14.
An aeropolis in the making. MAHB enjoys great potential in developing its massive 22,156-acre landbank. In the near term, as much as 50 acres may be allocated for a commercial business district, free commercial zone for warehousing and logistics, and possibly a theme park. In the near term, a factory outlet and Haj pilgrimage terminal are slated for completion sometime end-2013 to mid-2014. Within the next five years, the area could also include a golf resort and an auto city.
Works on KLIA2 on schedule. Management said KLIA2's progress is on track to commence operation by 1 May 2013. Works are 70% complete, with the major structures already in place while most of the roofing is done. Hence, the completion of most of its interior fit outs should be very fast from here. The runway is also on track to for completion and operation by 1 of May 2013. The extended ERL track, also targeted to be completed by March. is 95% complete, with only the terminal platform and ticketing offices yet to be constructed. The platform will be located within the terminal’s integrated complex. MAHB's management is guiding that by February-March, successful bidders for the retail outlets could commence works on their store fit-outs, which would only take four weeks.
Collecting rental from 1May 2013. By 1May 2013, at least 21,322 sq m of the total 35,200 sq m commercial place (or 60% of the 161 lots tendered out earlier) will be rented out for rental income. This is 4.4 times more than the existing 4,795 sq m of commercial space at LCCT. MAHB has collected only RM36.9m in minimum guarantee payment (MGP) and royalties last year from the 43 units leased out. A collective space of 6173 sq m in Phases 1 and 2 of its earlier tender exercise have successfully brought in a total RM50.2m in MGP per annum, translating into rental of RM8131 per sq m, which is 7% lower than the rental it fetches at KLIA’s satellite building. We estimate that collectively, all the KLIA2 commercial space leased out (we estimate this at 24,640 sq m), would be able to at least generate a MGP of RM169m for the full-year by 2014, compared to RM30.6m in 2011 from the existing LCCT. This will collectively boost total MGP to RM275m, versus RM139m in 2011.
New rental scheme to plug the leakages. MAHB’s existing rental model is based on the collection of revenue in the form of MGP or royalties (a percentage of sales, typically averaging 10%-15%). In the case of KLIA2, the company has structured its rental model in a way that it would be able to collect both fixed rent and fixed or variable royalty, whichever is higher. The percentage applied on its fixed royalty is based on 1%-2% of the sales generated. As royalty collection will enhance revenue collection since it is performance-driven, the airport operator will get to share the benefits of sales upside from its tenants arising from passenger growth as well as plug any leakages.
Boosting spending per pax. As of 9MFY12, spending per pax at both KLIA and LCCT stood at RM31.33, which was 17.5% higher than RM26.68 per pax last year. The breakdown of spending per pax stands at RM39.46 per pax from KLIA and RM22.69 per pax at the LCCT. A higher spending per pax is positive as any upside from this will boost MAHB’s revenue from royalties. Given the wider variety of shops and offerings at the bigger KLIA2, coupled by the increase in waiting times, we foresee that spending per pax will grow further. The higher spending per pax is expected to come from a large catchment of passengers, meeters-greeters and the 45,000-strong airport workforce.
Retail optimization at other airports. Other than focusing on KLIA2, management is also looking at optimizing retail revenue contribution from its airports in Penang, Langkawi and Kota Kinabalu as well. This will enlarge its revenue base to expand further moving forward, although any incremental impact on total revenue would be marginal.
Existing LCCT retail outlets. It is understood that the existing retail outlets at the LCCT will remain in operation until the very last day, which is scheduled to be end-April. As such, any loss in rental revenue next year is likely to be minimal. Following its closure, the LCCT terminal will be converted into a cargo warehouse, from which MAHB could generate as much as RM30m in lease rental a year.
KLIA2 a revenue booster. MAHB expects to generate RM2.151bn in revenue in FY12, of which RM1.058bn will be derived from aeronautical revenue while the remaining RM1.094bn will be non-aeronautical revenue. Of the non-aeronautical revenue, RM936m will come from retail (ERAMAN) and rental and royalties, with the remaining RM156m from hotels, plantations and project-based works. We expect KLIA2’s opening to boost revenue collection from retail, rental and royalties from RM936m FY12 to RM1.367bn in FY14.
MAHB to collect MARCS from PSC in 2014. The management guided that come FY14, the company would be enjoying Government subsidy on revenue (defined as Marginal Cost Support) from Passenger Service Charges (PSC) in the event that higher airport tax charges cannot be passed on to passengers, as outlined earlier under its operating agreement signed in 2009. Under the agreement, PSC will be increased every five years based on a compounded inflation formula. As it is unlikely that the higher PSC could be passed on to passengers (as the previous PSC hike was only passed to the passengers last year), MAHB would be able to collect revenue subsidies from the Government. It is uncertain what the quantum of the upcoming PSC hike would be, but based on an inflation pass-through formula, we estimate that any hike is likely to affect at least 15% of international passengers departing from non-low cost terminals and 15% of domestic passengers departing from any terminal.
To recap, in the last PSC increase last year, only the charges for international passengers departing from LCCT and Kota Kinabalu Terminal 2 were raised by RM7 to RM32. In addition, the RM14 which was previously collected from the Government was instead imposed on international passengers departing from major terminals such as KLIA, Penang, Subang, Kota Kinablu Terminal 1 and Langkawi. We are conservatively incorporating a net increase of 5% in average PSC to reflect the potential of an increase. This effectively raises revenue earned from PSC by RM45m in FY14.
For the purpose of DCF modelling, we are estimating that over the longer term, a 15% hike in PSC would be incurred every five years starting from 2019. This also includes a 15% hike in landing and parking charges every five years.
KLIA2 to be profitable in the first year. The management guided that KLIA2 will be profitable in the first year given the rental revenue secured coupled with the higher retail revenue it will be able to generate. The utilization rate is expected to jump to 50% next year. We also expect Malindo to bring in at least 1.5m departing passengers each year once it has 12 aircraft in operation, growing it by an aggressive 15% p.a. as it expands its Malaysian base further ahead. Although higher maintenance and operational costs are likely to be incurred by the new terminal, KLIA2 is unlikely to be a drag on overall profitability. MAHB is currently undergoing a tender exercise for various maintenance contracts for KLIA2, and we understand that bids placed will be very competitive. We have factored in 32% more operational costs increases for the KLIA2, with are bumping up total revenue estimates by 38%. KLIA2 is understood to have an EBITDA margin hovering around 55%-60%, versus KLIA’s 40%.
To incur higher depreciation expenses. Any drag in earnings will only come in the form of a higher depreciation expense incurred, which will likely balloon from RM211m currently to RM456m in FY13 given that the RM4bn costs of constructing KLIA2 will only be able to be depreciated at the remaining life of the concession, which is only 10 years. However, we understand that the management is hopeful that the once the Government gives a green light for the extension (of another 25 years) sometime next year, this will positively boost MAHB’s bottomline given the substantially lower depreciation cost incurred once its depreciation life is extended by another 25 years.
EBITDA to breach RM1.2bn in 2014. As of 9MFY12, MAHB generated RM623m in EBITDA. With only one remaining financial quarter to go, we expect its FY12 EBITDA to end at RM840m, while revenue will hover at around RM2.15bn. With KLIA2 commencing next year, we anticipate that EBITDA will jump to RM956m by FY13 and RM1.228bn by FY14 on the back of revenue of RM2.5bn and RM2.96bn respectively. For simplicity in our assumptions all this while, we are only assuming a half-year revenue and earnings contribution from KLIA2 as we firmly believe that KLIA2 would be able to commence operation by 1 May 2013.
No major expansion until 2022.
We see that MAHB will not likely need to take on any major capex exercise after the completion of KLIA2 until 2022, which by then would see MAHB incurring RM6bn to further expand capacity for KLIA2 and KLIA. The free-up in capex in 2014 will be a boost in generating free cash flow, which MAHB has not been generating over the past couple years due to the KLIA2 expansion. We expect MAHB to generate free cash flow to firm of at least RM420m in FY14 onwards, in absence of any major capex.
An aeropolis in the making. The total KLIA landbank is a massive 22,156 acres, of which 6,000 acres has been developed for existing airport infrastructures. With the remaining 16,156 acres still undeveloped, MAHB has a land tenure lasting until 2069 to capitalize on this land bank for any potential development. Over the mid- to longer term, as many as 50 acres is being targeted for development, which may include a commercial business district, free commercial zone for warehousing and logistics and possibly, a theme park. In the near term, a factory outlet centre and a Haj pilgrimage terminal is slated to be completed sometime by end-2013 to mid-2014. Within the next five years, the area could also include a golf resort and an auto city. The structure of these potential developments will be like its existing Integrated Complex Terminal that MAHB has in collaboration with WCT, where the former has been given a 30% associate interest in exchange for land to be developed. These developments will see MAHB raking in royalties, dividends and income share. Like its 30% stake that MAHB has in WCT’s Integrated Terminal Complex, note that we have yet to incorporate any incremental earnings from any of these potential developments.
Maintain BUY. We are tweaking our numbers slightly to incorporate higher operating costs in FY13, to be on the conservative side. For FY14, we are raising our revenue estimate as we factor in a PSC hike (net impact of 5%), which will likely be subsidized by the Government and more floor space rental at KLIA2, as our previous numbers had been too conservative. All in, we are lowering our earnings forecast for FY13 by 9% while nudging up our FY14 earnings numbers by 15%. Our DCF estimates are largely unchanged at RM8.00 although we are lowering our WACC from 9.5% to 9.1% in view of the reduced risk of delays and cost overruns at KLIA2. We maintain our BUY call on MAHB, which is our top aviation pick, as the airport operator continues to ride on resilient demand for air travel.
We see MAHB’s FY14 topline and EBITDA surging by 38% and 46% respectively versus FY12 numbers, as KLIA2 is on track to commence operations by 1 May 2013. We see KLIA2 as a game changer and a cash cow for MAHB from FY14 onwards in the absence of major capex, which may see the airport operator generating annual free cash flow of at least RM420m. We maintain our BUY call, with a DCF FV of RM8.00. MAHB is the top pick among our aviation coverage given its cash generating business amid booming demand for air travel.
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KLIA2 completion on track. According to the management, the completion of the upcoming Kuala Lumpur International Airport 2 (KLIA2) is on track and is scheduled to be operational by 1 May 2013. Currently 70%-complete, the major structures are in place while most of the roofing work is finished. From here on, the pace of completion for most of its interior fit-outs should progress quickly.
Revenue booster. KLIA2 is capable of handling up to 45m passengers and is expected to reach 50% capacity by the first year of operations. Come FY14, MAHB’s revenue is expected to further expand by 38% from the RM2.151bn it will register in 2012. A significant portion of the total will be derived from higher rental collected from KLIA2 as it will offer over four times the retail space at the existing LCCT. Although operation costs are expected to surge 32%, we expect the incremental flow to EBITDA to be immense, with EBITDA growing by 46% from RM840m in 2012 to RM1.23bn in FY14.
An aeropolis in the making. MAHB enjoys great potential in developing its massive 22,156-acre landbank. In the near term, as much as 50 acres may be allocated for a commercial business district, free commercial zone for warehousing and logistics, and possibly a theme park. In the near term, a factory outlet and Haj pilgrimage terminal are slated for completion sometime end-2013 to mid-2014. Within the next five years, the area could also include a golf resort and an auto city.
Maintain BUY. We are tweaking our numbers, which now incorporate higher operation costs for FY13, to be on the conservative side. For FY14, we are raising our revenue projection as we are factoring in a PSC hike (net impact 5%), which is likely to be subsidized by the Government, and higher rental income from KLIA2. All in, our earnings estimate for FY13 is 9% lower, while our FY14f earnings are nudged up by 15%. Our DCF estimates are largely unchanged at RM8.00, at a WACC of 9.1%. We maintain our BUY call on MAHB, which is our top aviation pick, as the airport operator continues to ride on resilient demand for air travel and its cash generating business.
Source: OSK
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