MAHB has opted to raise its stake in its Turkey venture (Sabiha Gokcen airport) to 60% by buying a 40% stake from partner GMR. We deem the deal as attractive, as it is valued at 15x FY12 EV/EBITDA with earnings growth  prospects  However,  there  is  only  a  5%  upside  to  our  new MYR10.27 FV post dilution from the private placement exercise to fund the purchase and the stock’s strong rally. Downgrade to NEUTRAL.

Buying  a  bigger  piece  of  the  pie  in  Turkey.  MAHB announced  that it will  be  buying  an  additional  40%  stake  in  ISG  and  LGM  from  GMR (GMRI  IN,  NR)  for  EUR225m  (MYR1,008m),  on  top  of  its  current  20% stake.  GMR  and  Limak  Holdings  are  its  consortium  partners  in  the Sabiha  Gokcen  airport.  MAHB  will  finance  the  acquisition  via  a  private placement with total proceeds amounting to MYR997m. Based on FY12 EBITDA  and  an  enterprise  value  of  EUR57.26m  and  EUR861.4m respectively,  the  amount  translates  to  a  valuation  of  15x  EV/EBITDA, which  is  in  line  with  average  valuations  of  recent  airport  acquisitions. Post  acquisition,  MAHB  will  indirectly  own  60%  of  ISG  and  LGM,  and consolidated  earnings  (of  the  two  entities)  will  still  be  treated  under  the equity accounting method. More importantly, the majority stake will give MAHB more control in the venture.

Growing prospects. We previously highlighted the growing prospects of Sabiha  Gokcen  airport  and  noted  that  Attarturk  airport,  the  main  airport of Istanbul, is experiencing heavy congestion and has limited capacity to expand its infrastructure. Furthermore, the new Istanbul airport, which is slated  for  completion  in  2016  (and  is  intended  to  replace  the  existing Attarturk  Airport),  will  not  likely  affect  the  growth  potential  of  Sabiha Gokcen given the latter’s closer proximity to the centre of Istanbul.

Downgrade to NEUTRAL. After incorporating the 10% dilution from the private placement exercise and pricing in the valuation of ISG and LGM of  MYR1.60  per  share;  our  DCF-derived  FV,  based  on  an  unchanged WACC  of  7%,  is  raised  to  MYR10.27  from  MYR10.13.  With  only  a  5% upside,  we  downgrade  MAHB  to  NEUTRAL  (from  Buy). We  would  only recommend  buying  below  MYR9.00.  Switch  to  our  Top  Pick,  AirAsia (AIRA MK, BUY, FV: MYR3.70) for exposure to the aviation sector.

Buying An Additional 40% In Sabiha Gokcen From GMR

Buying  a  bigger  piece  of  the  pie  at  a  fair  price.  MAHB  announced  that  it  will  be buying  an  additional  40%  of  ISG (İSTANBUL SABIHA GÖKÇEN ULUSLARARASI HAVALIMANI YATIRIM YAPIM VE İŞLETME A.Ş.)  and  LGM  (LGM  HAVALIMANI İŞLETMELERI  TICARET VE TURIZM A.Ş) from GMR (GMRI IN, NR) for EUR225m (MYR1,008m).  GMR  and Turkey’s Limak Holdings  are MAHB’s consortium  partners in Sabiha Gokcen airport.

Currently MAHB only owns a 20% stake, while Limak has a 40% stake in these two investments. ISG and LGM are currently loss-making due to the accounting treatment for  its  concessionaires.  Based  on  the  FY12  EBITDA  and  enterprise  value  of EUR57.26m  and  EUR861.4m  respectively,  the  purchase  price  values  the  stake  at 15x EV/EBITDA - in line with the average valuations of recent airport acquisitions. As a  yardstick,  Manchester  Airport  Group  (0570214D  LDN,  NR)’s  winning  bid  for Stansted Airport was valued at 15.9x historical EV/EBITDA.

The  acquisition  will  be  made  through  a  newly-formed  entity  (which  is  wholly-owned by  MAHB).  Post  acquisition,  it  will  indirectly  own  60%  of  ISG  and  LGM.  MAHB representatives  stated  that  earnings  will  still  be  treated  under  the  equity  accounting method (ie which will not be changed). More importantly, the majority stake will give MAHB more control in the venture.

Exercising  its  right  of  refusal.  Earlier last week, India’s Economic  Times  reported that  GMR,  India's  largest  private  airport  developer,  entered  into  a  definitive agreement with Turkey's TAV Airports Holdings (TAVHL TI, NR) to sell its 40% stake in Sabiha Gokcen airport. However, both MAHB and Turkey’s Limak Holdings (being the consortium partners) are entitled to block the bid. MAHB stepped up to make an offer  to  buy  the  40%  stake  by  exercising  its  “first  right  of  refusal”.  TAV’s interest in buying the stake from GMR  stems from the fact that it only has six years remaining on its concession at Attaturk Airport – Istanbul's main airport.

Funding through private placement. MAHB will finance the MYR1bn acquisition by a  private  placement  of  new  shares  of  up  to  10%  of  its  issued  and  paid-up  share capital.  The  price  discount  on  the  private  placement  shares  will  not  be  more  than 10%. We recommend long-term investors to subscribe  for the private placement. At an  indicative  price  of  MYR8.80  per  share  (10%  discount  to  last  closing)  and  an issuance size of 123.2m shares, this would raise total proceeds of MYR1084m, which is more than enough to fund the acquisition.

An  attractive  proposition.  The  deal  jointly  values  ISG  and  LGM  at  EUR562.6m, which  we  think  is  attractive  as  our  back-of-envelope  DCF  calculation  has  a  higher valuation of EUR807m (by 43.4%), after netting off the annual concession payments and  capex,  based  on  a WACC  assumption  of  9.75%  (see  overleaf).  This  translates into MYR1.60 per share (after the dilution impact from the private placement), which we  have  incorporated  into  our  valuation.  We  estimate  that  Sabiha  Gokcen  will  be cash  flow-positive  this  year  thanks  to the 25%  YTD growth  in  traffic  numbers  (as  of Nov  2013).  After  netting  off  the  annual  concession  payment  of  EUR95.6m,  we estimate that both ISG and LGM could likely achieve a free cash flow to firm (FCFF) of  EUR11.5m  on  the  back  of  a  revenue  and  EBITDA  of  EUR352m  and  EUR85.2m respectively in FY13.

Growing  prospects.  We  previously  highlighted  the  growing  prospects  of  Sabiha Gokcen  airport,  noting  that  Attarturk  Airport  -  the  main  airport  of  Istanbul  -  is experiencing heavy congestion and has limited capacity to expand its infrastructure. In  2012,  the  airport  ranked  lowest  in  a  study  of  Europe-wide  flight  delays  and cancellations by FlightStats, an independent provider of flight performance statistics. As  such,  we  see  Sabiha  Gokcen  airport  benefiting  from  the  traffic  spillover.  We understand the airport is also planning to construct an additional runway, targeted for completion by end-2015 or early 2016. As per  the concession agreement, capex for any  runway  expansion  would  be  borne  by  the  land  owner,  which  is  the  Turkish government.  The  runway  could  approximately  double  its  handling  capacity  from  the current 25m passengers per annum.

New Istanbul airport in 2016-17 will not affect the growth of Sabiha Gokcen. The new  Istanbul  airport  is  slated  for  completion  as  early  as  2016,  but  we  believe  it  will not affect the growth potential of Sabiha Gokcen, since the latter is situated closer to the centre of Istanbul. Furthermore, we would also not rule out delays of completing such  a  mega  project.  The  new Istanbul  airport  is  set  to  be  the  largest  airport  in  the world,  with  an  annual  passenger-handling  capacity  of  150m  with  a  targeted completion  within  a  4-year  time  frame.  Funding  for  the  initial  phase  (which  could amount to EUR7bn) could prove to be difficult as well on top of the EUR22bn that the concession holder will have to pay to the Turkish government.

Selling back  Delhi  stake  to GMR.  Media  reports have  noted  rumours  that  GMR is currently  engaged  in  discussions  to  buy  MAHB’s  10%  stake  in  Delhi  International Airport Ltd (DIAL) for USD73m. If this goes through, it would crystallise the valuation of its Indian venture, which we have not yet incorporated into our valuation.Upgrading  2015-19  passenger  forecasts.  We  upgrade  our  passenger  growth forecasts  for  2015-19  from  4%  to  5-7%,  as  we  had  been overly  conservative  in  our numbers,  considering  that  the  average  gross  domestic  product  (GDP)  multiplier  on passenger  growth  is  typically  at  a  minimum  of  1.5x.  Furthermore,  we  see  the upcoming  open  skies  policy  to  be  implemented  by  Asean  in  2015  further  boosting passenger growth.

Forecasts. Assuming a placement exercise at the indicative price of MYR8.80 for the acquisition and following the upgrade in passenger growth from 4% to 7% for FY15, our EBITDA and net income projection for FY15 is raised by 2% and 4% respectively. In  our  sensitivity  analysis,  a  1%  change  in  passenger  growth  from  our  base assumption would shift earnings by some MYR4m in FY14 and MYR9.6m for FY15. We  have  not  factored  in  any  earnings  estimates  and  dividend  contribution  from MAHB’s venture in Turkey for now,  as  we  note  that  it  is  still  loss-making  and  its shareholder’s equity  is  currently  negative  due  to  the  accounting  treatment  for  the 
concession.

Downgrade  to  NEUTRAL.  While we like MAHB’s prospects, we think the strong share price rally is likely capped for now, as there are renewed concerns over delays in  the  completion  of  KLIA2.  We  had  earlier  estimated  that  a  3-month  delay  would result  in  an  EBITDA  loss  of  MYR10m  -  as  the  lower  rental  and  royalties  revenue earned from the retail outlets would be cushioned by reduced operating expenses at KLIA2,  notably  from  electricity  and  maintenance.  Furthermore,  there  is  lack  of disclosure  on  the  financials  and  management  guidance  on  ISG  and  LGM,  although we still think our back-of-envelope calculation is deemed conservative.

After incorporating the dilution from the private placement exercise and pricing in the combined  valuation  of  ISG  and  LGM  of  MYR1.60  per  share,  our  DCF-derived  FV (based on an unchanged WACC of 7%) is raised to MYR10.27 from MYR10.13. This suggests an FY14 EV/EBITDA of 16.8x which may now be on the high side given the risks  of  a  further  delay  in  the commencement of  KLIA2. With  only  a  5%  upside,  we downgrade MAHB to NEUTRAL (from Buy). We would only recommend investors to buy  below  MYR9.00.  Switch  to  our  Top  Pick,  AirAsia  (BUY,  FV:  MYR3.70)  for exposure on aviation.

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Malaysia Airports Holdings is the operator of all the airports in Malaysia except for Senai Airport. It also owns stakes in various Turkish and Indian airports. 

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Source: RHB