CIMB Research retains Add for Malaysia Airports after concession extended

  • Business
  • Monday, 06 Feb 2017

The professional indemnity insurance policy submitted to MAHB was for a cover of RM3mil

KUALA LUMPUR: CIMB Equities Research is maintaining its Add call for MALAYSIA AIRPORTS HOLDINGS BHD (MAHB) and its discounted cashflow based target price of RM8.40 after its concession was extended for another 35 years.

The research house said on Monday it was upbeat on the Cabinet’s move to approve the extension of MAHB’s airport concession in Malaysia.

The original 25-year concession started on Feb 12, 2009 and will end on Feb 11, 2034. After the extension, the concession will be extended up to Feb 11, 2069, i.e. a full 60 years from the original commencement.

However, the terms and conditions of the deal are subject to further negotiation. A Negotiation Committee will be established, to be chaired by the Ministry of Transport and comprising members from the Ministry of Finance, MAHB and other relevant government agencies. 

Subsequently, the new terms and conditions will be submitted to the Cabinet for its consideration and approval.

“We have been waiting for this moment for years, as MAHB had begun negotiations with the government for concession extension as far back as 2012. 

“Securing the extension was an important KPI for Raja Azmi Raja Nazuddin, who joined MAHB as its new CFO on  Feb 1, 2016. To have secured the extension within the same year as his joining is a validation of Raja Azmi’s hard work and MAHB’s persistence.

“More hard work will be needed to hammer out the details of the extension. It may take as long as one to two years before a final deal can be cast in stone. The negotiations for the current 25-year concession took as long as four years,” it said.

CIMB Research said MAHB is seeking an improvement in the terms and conditions of the concession. For instance, at the moment, the User Fee, which is the quarterly concession payment to the government, stands at 11% of MAHB’s revenue and will increase at an annual rate of 0.25% pts. 

If the government incurs capex on commercially-viable airports, the User Fee will increase by 0.3% pts for every RM100m spent by the government.

“These terms are viewed by MAHB as onerous, as the User Fee will rise to 20% by the end of the new concession in 2069. 

“We believe MAHB will negotiate to reduce the rate of increase in the User Fee. MAHB may also seek the right to increase the PSC if it undertakes expansion capex on commercially-viable airports.

“Conversely, we are unsure if the government will ask for something in return for the extension of the concession. 

“This may take the form of an upfront transfer of cash or assets to the government at the start of the new 35-year concession term. It is impossible for us to predict what the outcome of the negotiations will be.

“We have factored in only half the value of the extension period into our DCF-based target price of RM8.40, in order to account for the risks associated with the upcoming negotiations on the details. 

“In addition, we have not factored in any potential reduction in the size of the User Fee rate, which we have assumed will inexorably climb to 20% by 2069.

“If MAHB succeeds in improving the terms and conditions of the Malaysian concession, there is potential upside to our target price. 

“In addition, we have factored in a very low valuation for Istanbul Sabiha Gokcen at only €382m, which is almost 30% below MAHB’s cost of investment. Any improvement in passenger traffic growth at ISG, or the emergence of a buyer of part of ISG, may lead us to lift valuations,” said CIMB Research.

The research house pointed out MAHB is currently depreciating its Malaysian concession assets until 2034, but can spread it out to 2069 from FY16F onwards. 

Given that 9M16’s depreciation is calculated on the old basis, the “over-depreciation” will be adjusted entirely in 4Q16, likely leading to very strong full-year results to be announced on Feb 28.

It also said moving forward, the “new” annual depreciation may be lower than the “old” basis by up to RM100mil, according to MAHB’s guidance. 

“Our forecasts have not adjusted for this yet, but if we did, MAHB’s FY17F P/E may fall from the current 45 times to 32 times, on par with Beijing International and slightly more expensive than AOT, thus removing a major mental block among foreign institutional investors,” it said.

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