Investment Research
KDN PP 10551/10/2005 For Private Circulation Only
Company Update
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12 August 2005 Chris Eng (603) 2162 4388 ext 372 chris.eng@osk.com.my Recommendation
Malaysia Airports Holdings
Outlook Still Somewhat Hazy
Strong international passenger numbers balanced by minimal growth on the domestic side. Still, 1H05 numbers are good enough for us to revise passenger forecast upwards. Accordingly, net earnings forecast raised by 2.3% for FY06 and 1.1% for FY07. Mixed news flow with potential that passenger numbers may be impacted if haze continues for longer period. Expanding Maintenance, Repair and Overhaul (MRO) activities may provide catalyst for re-rating once there is greater visibility on earnings impact. Given no further news on the restructuring of MAHB’s operating environment, we maintain our earlier assumptions in relation to lease rentals and concession fees.
NEUTRAL
Price RM2.07 12-mth target price RM2.00 (-3.4%) Share cap / Market cap 1,100.0m / RM2,277.0m Free float 14.2% Major shareholders Khazanah Nasional (72.7%) Bhd
DCF based fair value revised up to RM2.00. Even if concession fees were waived, DCF fair value only raised to RM2.34. Consider MAHB fully valued and a firm Neutral call. Share price has appreciated by 40% since we first upgraded MAHB to a Buy in March. Given the uncertainties still surrounding its restructuring, we advise investors to hold the counter pending further news.
Consensus (Net profit) 05F : RM124.5m 06F : RM140.3m
Earnings Table
Price performance chart Year to 31 Dec Turnover (RMm) EBITDA (RMm) Pretax (RMm) Net profit (RMm) FD EPS (sen) YoY change (%) PER (x) GDPS (sen) Div yield (%) ROE (%) NTA PS (RM) 03A 894.0 223.4 151.6 84.7 7.7 (43.9) 26.9 2.0 1.0 3.6 2.17 1.0 04A 1,024.7 290.9 195.6 125.2 11.4 47.8 18.2 3.0 1.4 5.1 2.27 0.9 05F 1,111.7 335.5 237.6 161.5 14.7 29.0 14.1 3.0 1.4 6.3 2.40 0.9 06F 1,193.6 374.9 275.0 192.5 17.5 19.2 11.8 4.0 1.9 7.1 2.54 0.8
th
Share price
2.5 2.0 1.5 1.0 0.5 0.0 Aug-04
Relat ive perf ( rhs)
50 40 30 20 10 0 -10
Nov-04
Mar-05
Jun-05
P/BV (x)
A very strong run
07F 1,246.2 393.8 292.6 210.7 19.2 9.4 10.8 4.0 1.9 7.3 2.71 0.8
Since we upgraded Malaysia Airports Holdings (MAHB) to a buy on the 4 of March 2005, the share price has appreciated by 39.9%. Although we remain optimistic that MAHB will record good earnings for this year, we would caution investors that at current prices, the company can no longer be considered undervalued. We take a closer look at the factors behind our view in this report.
Passenger Numbers Reasonably Strong
International passengers numbers are growing strongly… In MAHB’s report on passenger numbers between January to June 2005, international passenger growth was strong, particularly for those passing through Kuala Lumpur International Airport (KLIA). This was due to the overall growth in air passenger traffic after the bird flu virus outbreak early last year and the strong economic growth from 2004 that carried over into 1H2005.
Nonetheless, international passengers through other airports aside from KLIA, in particular th Penang, actually fell in part due to fears related to possible tsunamis after the December 26 disaster. Figure 1: Y-o-y Passenger Number growth at KLIA and Other MAHB airports for 1H2005
KLIA International Passenger Growth Domestic Passenger Growth Total Passengers
Source: MAHB
Other Airports -1.5% 0.7% 0.4%
Total 14.5% 1.7% 6.6%
17.4% 3.6% 12.0%
Figure 2: Passenger growth at KLIA
1600000 1400000 1200000 1000000 800000 600000 400000 200000 0 Jan Feb Mar April May June International passenger grow th not matched on the domestic side 2004 International 2005 International 2004 Domestic 2005 Domestic
Source: MAHB
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Figure 3: Passenger growth at Other airports
1600000 1400000 1200000 1000000 800000 600000 400000 200000 0 Jan Feb Mar April May June Passenger grow th in other airports not that exciting 2004 International 2005 International 2004 Domestic 2005 Domestic
Source: MAHB
… but domestic growth tapering down
Versus the strong 7.6% y-o-y growth recorded for domestic passengers in 2004, 1H2005 shows that domestic passengers only grew by 1.7%. This may indicate some saturation of the domestic passenger market after rapid growth in relation to AirAsia’s expansion over the past 3 years as well as the higher base effect. Adding on to this slowdown is the recently announced fuel surcharge by AirAsia which comes up to approximately 10% of their average fares charged. This will undoubtedly put some pressure on passengers thinking of whether or not to fly on domestic routes, particularly for those within Peninsular Malaysia. Nonetheless, the new Low-cost carrier (LCC) terminal to be completed in 2006 and the upcoming revamp of the domestic air sector will provide further impetus for growth in 2006.
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Forecast for international passengers revised up but reverse for domestic
Given the strong growth for international passengers, we revise up our forecast for international arrivals. The reverse is true for domestic passengers. Our revised forecast for FY05 and FY06 is captured in Figure 4 Figure 4: Revised forecast for passenger traffic at MAHB’s airports
Revised Forecast 2005 international passenger growth (%) 2005 domestic passenger growth (%) 2006 international passenger growth (%) 2006 domestic passenger growth (%) 14.2 1.8 10.0 4.0 Previous Forecast 14.0 2.0 9.0 4.0 Notes Strong international passenger growth spurred by Malaysia's tourism promotion Slight saturation of domestic sector after 3 years of strong growth Continued strong international sector growth with increased airlines stopping at KLIA Revamp of domestic air sector and new LCC terminal may provide a needed boost
Source: OSK Research
Earnings upgraded accordingly
This revision in traffic numbers lead us to revise up our net earnings forecast by 2.3% for FY06 and 1.1% for FY07 while FY05 numbers remain largely flat.
Mix of Good and Bad News Flows
News flows already factored into estimates In terms of the other news flow for MAHB, we have already factored these into our estimates. The news includes: • Expected completion of new LCC terminal with a capacity of 10m passengers by March or April 2006. We stick to our earlier forecast that this terminal will be operational by June 2006 The arrival of new airlines such as Shenzhen Airlines, Jet Airways and the increase in frequencies of other airlines The successful bid to host the 13th World Route Development Forum (Routes) in 2008
• •
The recent haze surrounding the Klang Valley has yet to negatively impact KLIA as the electronic equipment installed allows planes to land as long as visibility is above 300m. However, if the haze persists, we may see some cancellation of tourist arrivals and arrivals next year may be impacted as tourists choose other less hazardous destinations. On a better note, the recently announced Maintenance, Repair and Overhaul (MRO) ventures and expansions to be set up in the Malaysian International Aerospace Centre at Subang Airport is promising. These include SME Aerospace SB (SMEA), Composites Technology Research Malaysia (CTRM), Malaysian Airline System and today’s announcement by the National Aerospace and Defence Industries (Nadi) for a RM800m regional hub to convert passenger aircraft into transport carriers. For now, we await greater visibility on the rental revenue contribution from these ventures.
Uncertainty remains in Financial Restructuring
No news yet from Khazanah Although we understand that the financial restructuring of MAHB and its terms with the Government is among the top items on Khazanah Nasional’s to do list, nothing has yet to be announced. We understand that the revamp of MAHB’s operating environment has been tied in with the revamp of the overall domestic air sector and as such is still under review. Therefore, we maintain our assumptions as detailed below: 1. Operating lease rental for KLIA which amounts to RM60m for 2004 and increases by 4% annually plus 8% of KLIA’s aeronautical revenue will be waived. The rental is currently suspended MAHB will have to pay its outstanding concession payment of RM846.7m which will be offset by the sale of Sepang F1 circuit for RM389.4m
2.
3
3. 4.
MAHB’s portion of the International airport tax will be increased by RM7 while domestic tax will be increased by RM1 effective 2006 to RM47 and RM7 respectively. MAHB will have to pay for airport upgrades while the Malaysian Government will pay for new terminals such as the new satellite terminal and the LCC terminal.
Valuation
DCF based fair value raised Based on these assumptions, our DCF based fair value of MAHB, after incorporating our to RM2.00 revised traffic projections, is raised to RM2.00 from our previous fair value of RM1.93. The calculation of cash flow is shown in Figure 5 incorporating the following assumptions: • WACC of 12.2% • • Terminal rate of 4% Capex of RM280m in 2005 tapering down to RM100m annually as infrastructure upgrade which was delayed for 2003 and 2004 will be incurred in 2005/2006.
Figure 5: DCF calculation for MAHB
t EBIT Less: Taxation Add: Depreciation Less: Capex Free Cash Flow Discount Rate Discounted CFs Terminal Value Total DCF Add: Cash-Liabilities Net DCF Share Capital FCF to Firm/Share
Source: OSK Research
2005 0 236.7 -76.0 69.7 -280.0 -49.6 1.000 -49.6
2006 1 274.0 -82.5 71.8 -100.0 163.3 0.891 145.5
2007 2 291.5 -81.9 73.2 -100.0 182.8 0.794 145.1
2008 3 314.1 -88.3 74.7 -100.0 200.5 0.707 141.8
2009 4 364.0 -102.3 75.4 -100.0 237.1 0.630 149.4
2010 5 382.8 -107.6 76.2 -100.0 251.3 0.561 141.1
2011 6 402.5 -113.2 77.0 -100.0 266.2 0.500 133.2
2012 7 422.5 -118.8 77.7 -100.0 281.3 0.446 125.4
2013 8 440.5 -124.0 78.5 -100.0 295.1 0.397 117.2
2014 9 495.3 -139.4 79.3 -100.0 335.3 0.354 118.6
2015 10 513.4 -144.5 80.1 -90.0 359.0 0.315 113.2 1,429.4
2,710.4 46.1 2,756.5 1,100.0 2.51 Less 20% discount
2.00
Current share price fully Given that the current share price is RM2.07, we feel that MAHB is fully valued. We consider valued our assumptions to be reasonable and not conservative. If our assumption no. 2 is incorrect and the outstanding concession fees are waived, our fair value would be raised to RM2.34. Only if a much higher increase in airport charges was approved, would MAHB’s fair value jump A firm Neutral call substantially. As such, MAHB is a firm Neutral call. Although our fair value is at a discount to the current share price, given the possibility that the Government may offer a very attractive deal to MAHB, we maintain a Neutral call while awaiting further news .
The information in this report has been obtained from sources believed by OSK Research Sdn Bhd (OSK) to be reliable but its accuracy or completeness is not guaranteed. Opinions contained herein are subject to change without notice. This report is for informational purposes only and is not to be construed as an offer or solicitation for the purchase or sale of any financial instrument. This report does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may receive this report and is not a substitute for the exercise of independent judgement. We accept no liability for any direct or indirect loss arising from the use of this report. Copyright and database rights protection exists in this report and it may not be reproduced, distributed or published by any person for any purpose without the prior express consent of OSK. All rights are reserved. We, our associates, directors, employees may have an interest in the securities and/or companies mentioned herein. Hilmi Mokhtar Senior Vice President, Advisor OSK Research Sdn. Bhd. (206591-V) 6th Floor Plaza OSK, Jalan Ampang, 50450 Kuala Lumpur
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