THE BUZZ  

Malaysia  Airports  Holdings  Berhad  (MAHB)  through  its  joint  venture  company  in  the Republic of Maldives, GMR Male International Airport Pte Ltd (GMIAL) ' the concession holder of the Ibrahim Nasir Airport ' has received a letter dated 27 Nov 2012 issued by the  Ministry  of Finance  and  Treasury  of  Republic  of  Maldives  (MoFT)  notifying  that  the concession  agreement  dated  28  June  2010  for  the  rehabilitation,  expansion, modernization,  operation  and  maintenance  of  the  Ibrahim  Nasir  airport  concession  is 'void  ab  initio' (terminated)  due  to  several  purported  grounds.  MoFT  also  notified  that the Maldives Airport Co Ltd together with MoFT will take over possession and control of the airport and all facilities which were subject of the Agreement within seven days from the date of the said letter.

To  recap,  GMIAL  is  a  joint  venture  company  set  up  by  the  consortium  of  GMR  Group from India and MAHB after the consortium was declared the winning bidder in an open tender  privatization  exercise  organized  by  International  Finance  Corp,  a  World  Bank group,  on  behalf  of  the  Government  of  the  Republic  of  Maldives.  MAHB  holds  a  23% stake in GMIAL. As 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).            
 

OUR TAKE 

Banging it  hard.  The  actions  by  the  Maldives  government  to  terminate  the  contract,  a project  awarded  by  the  island nation's previous regime to  the  consortium  '  majority-owned by India's GMR Group '  has  exacerbated  the  already  strained  relations  with neighbouring  India,  which  warned  it  would  "take  all  necessary  measures  to  ensure  the safety and security of its interests and its nationals in the Maldives. GMR has also said 'This  unlawful  and  premature  notice  on  the  pretext  that  the  concession  agreement  is 'void' is completely devoid of any locus standi, and is, therefore, being challenged by the company before the competent forums.' We understand that  one  main  reason  that  the new  government  decided  to  take  over  the  Male  airport  was  due  to  the  USD25  airport development fee, which GMR insists was built into the contract.
 
Worst  case  scenario.  Although  the  airport  consortium  still  intends  to  maintain  its concession  of  the  Male  airport,  in  the  worst  case  should  the  takeover  by  the  Male government  happen,  MAHB  will  recoup  its  investment  costs  from  the  compensation made by the government plus a possible penalty fee.
 
Impact to earnings. Should the worst case scenario happen, impact to earnings would be  a  drop  in  associate  contributions  from  Male  of  RM30m  per  annum  at  an  inputted annual growth rate of 5%. This would see earnings for FY13 and FY14 drop by 6% and 4%  respectively.  On  a  DCF  valuation  perspective,  there  will  not  be  any  change  given that  associate  earnings  do  not  impact  cashflow  and  we  have  not  factored  in  any potential dividend contribution from Male Airport.

Maintain BUY. It is premature to make any changes to our forecast now. We maintain our RM8.00 DCF target price. We continue to like MAHB's outlook  and  its  KLIA2  story which would give boost to earnings from FY14 onwards.

Source: OSK