We believe MAHB may resort to a cash call to prevent an overhang on ISG’s  valuations.  Maintain  BUY  and  DCF-based  MYR8.51  TP,  a  27% upside.  ISG’s  role as a relevant airport could  diminish  if  management does  not  exercise  its  ROFR  against  TAV’s  acquisition.  Thus,  owning 100%  of  ISG  could  result  in  an  attractive  implied  10.6x  FY15F EV/EBITDA for MAHB vs Airports of Thailand’s 12.5x. 

Today is the day.  Malaysia Airports (MAHB)  will state  today  whether it will  exercise  right  of  first  refusal  (ROFR)  to  block  TAV  Havalimanlari(TAV) (TAVHL TI, NR) from landing 40% of Sabiha Gokcen Airport (ISG)for  EUR285m  from  stakeholder  Limak.  Limak  had  earlier  said  it  would sell to  TAV  if MAHB does not exercise  its  ROFR.  At that price, ISG  is valued  at  EUR712.5m,  ie  12%  lower  than  our  EUR808.87m  valuation. Our  valuation  assumes  ISG  breaking  even  by  2016  and  profitable  by 2017 at EUR13m (management’s guidance: profitable by next year). 

Holding the  fort. We think MAHB is  not keen to partner  TAV.  Assuming it  does  not  exercise  its  ROFR,  we  opine  TAV  still  focusing  on  making Istanbul  Ataturk  Airport (Ataturk) Turkey’s  primary hub  despite owning a stake in ISG.  In such a case, ISG’s role could be irrelevant until 2018 at the  earliest,  once  Istanbul’s  third  airport  opens  with  Ataturk  closing operations.  Should MAHB fail to block TAV’s attempt to buy  the  stake, this could create a valuation overhang  on ISG,  as losses may prolong. ISG  has  become  more  relevant  recently  given  Ataturk’s  congestionwoes. Turkish Airlines and Qatar Airways have also started to land there. 

ISG’s  debt  restructuring.  We  understand  that  MAHB  is  restructuring ISG’s  borrowings,  potentially  saving  up  to EUR8m-5m  annually  in financing  costs.  It  would  want  to  maintain  its  AAA  debt  rating  and  this could likely see  MAHB  going for a 100% share issuance, in our view,  vs debt.  Furthermore,  an  acquisition  via  100%  debt  could stress  earnings and cash flow as annual interest payments could be at least MYR45m.  

Maintain  BUY.  MAHB  could  opt for a  100%  cash call if  it exercises theROFR  and  fully  acquires  ISG.  At  a  20%  discount  on  rights  shares,  its share base  could expand 16%, which would cut its TP to MYR7.82.  We maintain our MYR8.51  TP  pending MAHB’s  final  decision.  On a positive note,  the  full  consolidation  of  ISG  may  make  it  more  attractive,  as  its implied  EV/EBITDA  would  only  be  at  10.6x  (from  11.7x  on  the  60% exposure currently), after factoring in all  of  ISG’s FY15F  EUR400m  net debt  and EUR121m  EBITDA.  This makes  MAHB  more attractive vis-àvis  Airports of Thailand’s (AOT TB, BUY,  TP: THB245.00)  target  12.5x FY15 EV/EBITDA

Source: RHB