While the macro outlook continues to be promising for Malaysia Airports (MAHB), driven by the resilient low cost travel segment, we highlight that the higher User Fee payable to the Government coupled, with the steeper costs to operate KLIA2, could put a dent in its earnings. As such, we trim our FY13 and FY14 numbers by 35% and 32% respectively. Nonetheless, prospects for FY14 onwards will be promising as its free cash flow turns positive, the first since FY07. We maintain our BUY call at a lower FV of RM7.23 premised at a lower WACC of 7.6%.
Passenger numbers in line. MAHB recorded a total of 60.6m passengers in 11MFY12, representing a growth of 4.7% YTD. With December being a peak period for air travel, we expect MAHB to end the year with a 5% passenger growth, which is in line our and consensus’ expectations. We have a 11% passenger growth forecast for FY13, far ahead of MAHB’s KPI target of 7.1%, which we deem too conservative.
4Q likely within expectations. 4QFY12 earnings is expected to come in at RM132m, representing a 40% y-o-y and a 22% q-o-q increase respectively. We foresee that earnings will be driven by strong passenger numbers (+8.4% y-o-y, +8.7% q-o-q), which in turn translates to higher non-aeronautical revenue. Unfortunately, the airport operator would likely see its earnings hit by provisions following the termination of the Male Airport concessionaire, although this will not hit our core earnings estimate.
Higher User Fee to be incurred. Management guided that FY13 earnings will be lower due to the higher User Fee it will have to pay to the Government. Upon the full settlement of the Balance Residual Payment in 1Q13 under its new operating agreement signed back in 2009, the User Fee will thereafter be fully recognized in the income statement. The higher User Fee is estimated to be in the tune of RM220m-RM240m in FY13, which is double the amount MAHB is expected to incur in FY12. Due to the higher User Fee, we are trimming our FY13 and FY14 earnings by 35% and 32% respectively. We have also factored in a higher cost assumption to operate the upcoming KLIA2.
BUY. We lower our FV to RM7.23 following the earnings downgrade, premised on a WACC assumption of 7.6% after revising our CAPM variables. We continue to like MAHB's prospects for its non-aeronautical revenue from the upcoming opening of the KLIA2 sustained by the growing demand in the low cost travel segment.
KEY HIGHLIGHTS
2013 to be a better year for passenger growth. MAHB recorded a total of 60.6m passengers in 11MFY12, representing a growth of 4.7% YTD. With December being a peak period for air travel, we expect MAHB to end the year with a 5% passenger growth, which is in line with our and consensus’ expectations. We understand that both MAS and AirAsia had in December took in delivery of nine and five aircraft respectively, which could result a surge in passenger traffic. For 2013, we forecast a 11% passenger growth, far ahead of MAHB’s KPI of 7.1%, which we think is too conservative considering that AirAsia and AirAsia X are expected to see 10 and seven aircraft delivered in 2013 respectively. The setting up of a new airline, Malindo, will also boost MAHB’s passenger numbers while MAS will also be increasing the frequency of its short- to mid-haul segment after scaling back its long haul operations last year due to route rationalization. The capacity expansion by low cost carriers in Thailand should also bode well for the airport operator.
FY12 and 4QFY12 to be within expectations. After revising our estimates down to remove any contribution from associate Male Airport for 4Q following the concession termination by the Male government, we anticipate that MAHB will see a full-year core earnings contribution of RM458m (previously RM463m) on the back of RM2.15bn in revenue. For 9MFY12, MAHB recorded a core net profit of RM326m, which accounts for 71% of our new FY12 forecast. 4Q earnings is expected to come in at RM132m, representing a 40% y-o-y and a 22% q-o-q increase respectively, of which earnings will be driven by stronger passenger numbers (+8.4% y-o-y, +8.7% q-o-q), hence translating to higher non aeronautical revenues. MAHB is scheduled to release its earnings on the 18 Feb.
Compensation for Male Airport. MAHB would likely see its earnings hit by provisions following the termination of the Male Airport concessionaire although this will not hit our core earnings estimate. Compensation for the termination is likely and Management is seeking higher compensation due to the loss of future potential revenue. As of to date, MAHB has invested a total equity of USD6.9m (equivalent to RM21.5m) and has accounted for an accumulated share of associate profits of approximately USD13.2m (equivalent to RM41.2 million). In any case, any compensation will not impact on our FV due to the exceptional nature of the item.
2013 and beyond to take a hit on higher user fee. Many question why MAHB’s KPI forecasted 2013 EBITDA of RM751m, which is lower than our FY12 forecast of RM840m and the RM737m it achieved back in 2011. Management guided that FY13 earnings will be hit by the higher User Fee to be paid to the Government. Currently, only half of the actual User Fee paid by MAHB to the Government is reflected in the income statement whilst the other half is deducted from the amount due (parked in non-current payables) for the Balance Residual Payment arising from MAHB’s restructuring exercise completed back in February 2009. Originally when the restructuring exercise was done, the amount of the Balance Residual Payment was RM419m and by 1QFY13, MAHB is expected to have a balance of only RM25m-RM30m. Upon the full settlement of the Balance Residual Payment in 1Q13, the User Fee incurred will be fully recognised in the income statement and as such, 100% of the User Fee to be paid to the government will be reflected in the net income moving forward. The User Fee is expected to be the tune of RM220m-RM240m, which is more than double the RM103m MAHB is expected to incur in FY12 and the RM84.2m it had incurred in FY11.
Trimming earnings. Due to the higher User Fee expected to be forked out, earnings for FY13 will take a hit. Consequently, we trim our FY13 and FY14 earnings by 35% and 32% respectively. We have also factored in a higher cost assumption for operating the upcoming KLIA2 as we anticipate that direct overheads, utilities and maintenance costs will increase by 30% and 15% y-o-y in FY13 and FY14 respectively, premised on the assumption that the KLIA2 will commence operation by 28 June.
Delay in the opening of KLIA2? MAHB is committed to see KLIA2 commencing operations by 28 June 2013 as announced by the Prime Minister. Any delay in the airport’s commencement will likely be attributed to completion of a new runaway and its apron. Even if this is likely the case, we foresee that the upcoming KLIA2 will still be able to operate with its existing two runaways although this would not bode well for airline operators due to the long taxi for take-off and traffic congestion. However, we understood from AirAsia that based on the current rate of aircraft delivery, the existing runaways in KLIA will still be enough to accommodate the low cost carrier’s expansion until next year. Furthermore, we understand that of the 10 aircraft to be delivered this year, not all will be placed at its hub in Kuala Lumpur as some will be dedicated to serve in its hubs in Kota Kinabalu and Johor.
It’s the cash flow… Whilst earnings are expected to drop, we highlight that MAHB’s operating cash flow is expected to improve from FY13 onwards. FY13 operating cashflow is expected to be bumped up to RM689m from RM573m in FY12f. Due to the fact that MAHB will still incur substantial capex for the remaining construction of the KLIA2, the capex for this year is still expected to be significant – to the tune of RM1bn-RM1.1bn. Most of the capex allocation in the immediate term will be funded by the remaining drawdown of its sukuk facility and through its recently announced dividend reinvestment plan. MAHB’s Free cash flow to firm is only expected to turn positive by 2014 – we estimate the figure to be RM597m. This amount is a reversal from the negative free cash flow of RM828.5m and RM411m MAHB incurred in FY12 and FY13.
Higher dividends seen? We are nudging up our dividends from a 50% payout to a 60% payout as we estimate that MAHB would not take into account the higher depreciation charges starting this year in determining its overall dividend payout considering the likelihood of its Malaysian concessions being extended. For simplicity, due to the lack of clarity on the take up rate of its dividend reinvestment plan (DRP), we have not incorporated any DRP take up rate in our assumption. At 60% payout, this would translate to a yield of 2.4% and 3.5% in FY13 and FY14 respectively. Our assumptions are considered conservative as we expect its Free cash flow to equity (FCFE) – after changes in borrowing repayments etc – to bump up to RM438m in FY14 from a negative FCFE of RM242.7m in FY13.
Maintain BUY. We maintain our BUY call but we lower our FV to RM7.23 following the earnings downgrade of 35% and 32% in FY13 and FY14 respectively. Despite the lower earnings, a further drop in our FV is cushioned by a lower WACC assumption of 7.6% from 9.1% earlier after revising our CAPM variables, notably on the lower expected market return given the risk of the impending General Election. Although on a FY12 and FY13 EV/EBITDA perspective, MAHB is 15% pricier than Airports of Thailand (BUY, FV: THB120) currently, we think the slight premium is warranted in view of the former’s operational free cash flow turnaround. A comparison on a PE multiple basis would prove to be meaningless given the high depreciation expense pending the concession extensions expected to be granted by the Government after the General Election. We continue to like MAHB’s outlook and its KLIA2 story which would boost its cash flow from FY14 onwards, its first positive free cash flow since 2007.
