MAHB’s FY12 core net profit came in line at 3.5% above our forecast but 6% above consensus. The improved earnings were attributed to higher passenger spending and lower airline incentives. Per pax spending continues to grow on optimized retail space, which is very encouraging as this gives hope that KLIA2 could very well succeed in luring passengers to spend more. We continue to like MAHB and maintain our BUY call, with an unchanged FV of RM7.23.
4Q earnings boosted by lower airline incentives. MAHB’s FY12 core earnings of RM474m (y-o-y: +9%) were 3.5% above our forecast, deemed in line, but 6% above consensus on the back of RM2.16bn in revenue (y-o-y: +12%). For 4Q, MAHB’s core earnings rose by 31% y-o-y and 38% q-o-q as revenue grew by 13% y-o-y and 10% q-o-q respectively on the back of seasonally stronger passenger traffic and spending. The earnings surge in the final quarter was largely attributed to lower airline incentives, just as we had anticipated. During the quarter, exceptional items totaled RM103m, notably the RM68.9m impairment on its investment in Male following the termination of the concession by the new ruling government and the RM30.5m additional losses from its other associate, Sabiha Gocken.
Exceeding KPI target. MAHB recorded a FY12 EBITDA of RM870m, surpassing its EBITDA KPI target of RMRM822m and also our initial forecast of RM840m. Had it forked out the same amount of airline incentives as FY11 (RM65m in FY12 vs RM104m in FY11) it would have probably missed its KPI.EBITDA margin improved from 38% to 40%.
Per pax spending continues to grow. We note that per pax spending continued to improve on higher retail space optimization. Per pax spending at duty free Eraman rose by 9% while total KLIA sales per pax grew by 4%. Duty free revenue in LCCT has still not surpassed that from KLIA despite the higher passengers handled and per pax spending (+6% y-o-y), which is very encouraging as it suggests that the upcoming KLIA2 would see stronger passenger spending due to the various retail therapies it will offer. KLIA2 will have more than 200 shops versus the 60-plus in LCCT currently. We do note, however, that the average rental revenue per sqm in KLIA and LCCT combined dipped slightly as MAHB was probably squeezing in more outlets at the KLIA satellite terminal to generate more spending revenue.
Positive outlook reiterated. We continue to believe that outlook moving forward remains promising for MAHB on the back of an expected higher non-aeronautical revenue contribution from KLIA2, which is on track to commence operations by end-June. Unlocking the value from its landbank development is another upcoming catalyst. We understand that MAHB is currently in discussions with several parties to develop a theme park, golf course, hospital for medical tourism and a shopping mall in KLIA. Management is also in active discussions to lure in more carriers to hub in KLIA, notably British Airways and Qantas following the entry of Malaysian Airlines into the Oneworld Alliance in February this year.
43% drop in FY13 forecast not alarming. The sharp 43% y-o-y plunge in FY13 earnings forecast is largely attributed to the higher depreciation and amortization costs of the KLIA2 coupled with the higher user fee incurred. Note that FY13 operating cash flow will improve to RM689m compared to RM643m in FY12. Still, management is hopeful of getting its airport concession extended before the commencement of the KLIA2 in end-June. This will have a big positive impact in its bottomline as it will potentially reduce amortization and depreciation expense by as much as half from the RM456m we estimated will be incurred in FY13. Furthermore, FY13 earnings will also be hit by MAHB’s substantially high user fee expected at approximately RM200m vs RM99m in FY12. As we have highlighted earlier (see report titled: “Toning Down”, dated 30 Jan 2013) the higher user fee charged only reflected a change in accounting charge. The user fee was previously reduced from the balance sheet but upon the full settlement of the balance residual payment in 1QFY13, it will now eat into MAHB’s net income. Hence, the percentage of total revenue paid and its cash outflow to the government remains unchanged.
Look at cash flow instead of earnings. We introduce our FY14 numbers. We expect earnings to grow by 10% y-o-y. For an apple to apple comparison, we deem cash flow earnings to be a more appropriate earnings gauge. We expect MAHB’s operating cash flow to improve further to RM792m in FY14. Also, in absence of any onerous capex after the completion of the KLIA2, we anticipate its free cash flow to return to positive territory. This gives the possibility for management to potentially dish out higher dividends.
Maintain BUY. Premised on a WACC of 7.6% and a 0% terminal growth rate, we maintain our fair value for MAHB at RM7.23 with our BUY call retained. On an EV/EBITDA basis, this gives an implied value of 11.4x on its FY14 EBITDA. We use FY14 earnings estimate, as it is better yardstick in gauging its valuation due to the full contribution of KLIA2. At 11.4x implied EV/EBITDA, we deem that the valuation multiple is 15% premium to peers’ current average but a discount of 15%-20% to mature airports with high free cash flowyields. This is justifiable in our view due to the catalysts in store, namely KLIA2 and MAHB’s land bank development.
Analyst briefing takeaways:
1. The KLIA is currently 80% completed and is on track to commence operations by end-June. Management expects to start operational readiness by end-April. There will be no cost overruns.
2. Malindo is expected to commence flight operations sometime in mid March. Management understands that promotional ticket sales could kick off this weekend. In the interim, Malindo will be operating from KLIA, which is a positive for MAHB due to the higher airport tax charged there.
3. Management has an ambitious target for KLIA2’s retail – total sales generated by outlets operating in KLIA2 are expected to hit RM790m in FY13. This is sharp improvement from the total sales generated in LCCT of RM447m. We are a bit more conservative than this.
4. Among the airlines that MAHB is in active discussions with, to lure them in, is Turkish Airline. Note that Turkish Airline is undergoing an aggressive branding exercise with the ambition of putting it on par to the likes of Emirates.
5. Middle Eastern carriers continue to be very aggressive in expanding their market shares. Carriers such as Qatar Airways have seen their passenger numbers in KLIA outpacing passenger numbers in Singapore’s Changi.
6. Following MAS’ entry into the Oneworld Alliance, management is hopeful that British Airways and Qantas could use the KLIA as a hub, connecting passengers from Europe and Australia.
7. On the Sabiha Gocken Airport in Istanbul:
- Prospects of its associate airport in Istanbul, Sabiha Gocken, are verypromising and management is keen to increase its stake in the airport. Sabiha Gocken is located on the Asia side of Istanbul and more passenger and airlines will fly into the said airport come 2014 when the tunnel access (for cars and trains) connecting to the busy Europe side of Istanbul is completed. Management is banking on the fact that Istanbul’s main airport, Atarturk located in the Europe side, is very congested and that the government is also setting up a second runway at Sabiha Gocken. Hence, some carriers may divert their operations to it as a second airport. Currently, Atarturk remains the favoured airport as it is located on the busy Europe side of the continent where Istanbul’s commercial activities are, although 90% of the population lives on the Asia side. Due to congestion at the Atarturk Airport, the Turkish Airline has shifted some capacity to Sabiha Gocken.
- Sabiha Gocken airport is expected to be profitable come 2015-2016onwards given improving traffic and lower airline incentives. Furthermore, management is also in the midst of refinancing its loan to a cheaper rate to take advantage of Turkey’s improved investment rating grade.
- Although a 3rdairport is planned in Istanbul, Sabiha Gocken will meanwhile ride on the passenger spillover from Atarturk. Once the tunnel access is completed, it will take less time to connect between the two continents currently linked by a bridge, on which traffic can be horrendous. Sabiha Gocken is only 40km away from Istanbul, the same distance where the upcoming third airport will be constructed. Istanbul’s major airport, Atarturk on the hand is located closer to city at a distance of only 20km.
8. Airlines incentive budgeted for FY13 is RM60m vs RM65m in FY12 and RM104m in FY11. This is due to lower passenger growth brought in by the carriers given the high bases.
9. Upon the commencement of KLIA2, LCCT will be refurbished and converted into a cargo warehouse with an expected annual lease rental of RM20m-RM30m. The capex allocated for this is minimal at RM10m.
10. Land bank development prospects remain exciting although this is more of a longer term catalyst. LOIs has been signed with several parties to develop a theme park and a medical tourism hospital. Currently, management is in the midst of processing an LOI with another party to develop a golf course.
11. Court proceedings to recoup investment costs and potential revenue losses from the termination of the Male airport concession are ongoing. MAHB has decided to impair its investments to be on the conservative side although its partner GMR has not decided to.
12. Foreign shareholding is at an all-time high of 14.4% from 9% in FY11.
13. Management is not concerned over the setting up of a High-Speed Rail between Kuala Lumpur and Singapore. It expects that by then, traffic would be well cushioned and the drop in passenger traffic on the KL-Singapore sector will be offset by passenger growth on other sectors as MAHB also stands to benefit from the Open Sky Policy effective 2015. We also understand that MAHB will not be compensated by the government in any form if the High-Speed Rail is set up and its operating agreement for the airport concession would remain unchanged. Based on MAHB’s 2011 annual report, a total of 2.944m passengers were handled on the Singapore (Changi) – Kuala Lumpur (LCCT/KLIA) route, which has seen a CAGR of 11.9% yearly over the past five years. Assuming a 12% y-o-y growth rate for last year, this route represents 8.2% of total passengers handled in KLIA and LCCT combined and 4.9% of total passengers handled by MAHB. In terms of number of flights, we estimate that this would account for approximately 5%-5.5% of total aircraft movements handled by MAHB’s airports in Malaysia.
Source: OSK
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