Looks good, on the onset. MAHB-YTLC’s bid for Stansted Airport, if true and if the bid is secured based on the broad terms reported by newswires last night, is positive for both MAHB and YTLC. If MAHB steps into the airport manager role as reported, it would earn “secured” fees although just a small impact to its bottomline. And, if YTLC secures the “asset ownership” role, this may hasten its bid to privatise YTLP. We await further clarification from both. Our call on MAHB remains a BUY with a MYR6.90 DCF-based target price, while YTLC is Not Rated.

Partners in Stansted? Malaysia Airports (MAHB) has formed a consortium with YTL Corporation (YTLC) to bid for UK's Stansted Airport in a deal valued at around GBP1b (MYR5b), Dow Jones Newswires reports last night. MAHB will likely take on the airport management and operation role, while YTLC is looking to take up the role of a developer in and around the airport area (“asset ownership”) if the consortium wins the bid. There are no further details.

About Stansted, what we gather. Based on its 2011 accounts, the airport operations generated GBP234m revenue, GBP87m normalised EBITDA (37.2% margin), GBP46m operating profit (19.7% margin) and GBP21m net profit (9% margin). Shareholders’ fund meanwhile was GBP954m. Assuming that the bid price of GBP1b is the enterprise value, this implies an EV/EBITDA of 11.5x. This seems a fair price as Malaysia Airports is now trading at 10.8x multiple. The GBP1b bid also implies around 1x price-to-book (historical) valuation.

MAHB as an “asset owner”? We are of the view that MAHB is unable to acquire the Stansted Airport on its own due to its balance sheet constraint as the reported GBP1b bid price equates to 70% of its current market capitalisation. Furthermore, Stansted Airport's operating margin of 19.7% in 2011 was significantly lower than MAHB's ±25% levels, and therefore could dilute earnings. Thus, we see little chance for MAHB to partake for a major “asset ownership” role. If it features, it is likely a minority role, with YTL Corp being the major shareholder.

But, operator more likely. However, MAHB is more than capable to manage the airport on behalf YTLC. An airport management contract does not require any capital outlay from MAHB and is instantly profitable. However, a basic management contract value is not material and will only contribute to MAHB's bottomline by GBP2-5m annually, we estimate, assuming 1.0%-2.0% fee on the airport’s revenues.

Could YTLC’s bid speed up YTLP’s privatisation? YTLC’s role seemingly revolves around “asset ownership” and property development, which means that YTLP is unlikely to be directly involved in this bid. We have yet to verify this story. Hypothetically, a successful bid would mean the need for more cash at YTLC, with one possible source being YTLP’s cashflows (in the form of higher dividends post privatisation). Based on our FCF estimates, YTLP can comfortably pay out >MYR0.5b of dividends p.a..

Source: Maybank Research - 10 Jan 2013