Damned if you do, damned if you don’t

The offer extended by GDA seems to be more than fair but the market is not biting.

Much has been said by the media and various theories put together as to why Malaysia Airports Holdings Bhd (MAHB) is set to be privatised via a consortium comprising local institutional funds and supported by two giants in the business to take the country’s largest airport operator to the next level.

The purpose of this week’s column is to look at the two perspectives as to what is in store for them, that is, the current minority shareholders and post-privatisation structure, as well as the challenges ahead.

Based on the announcement dated May 15, 2024, the joint offerers, which involves companies representing the shareholding of the Employees Provident Fund (EPF), Khazanah Nasional Bhd and GIP Aurea Pte Ltd (GIP), with 41.22% shareholding in MAHB, intend to take the company private at a cash offer price of RM11 per share, valuing the remaining shares not already owned at RM12.3bil.

Upon completion, Khazanah’s stake will increase from 33.24% to 40%, while the EPF will see its shareholding rise from 7.86% to 30%. The remaining 30% block will be held by GIP.

GIP is represented by two powerful shareholders – Abu Dhabi Investment Authority and Global Infrastructure Management, LLC (GIM). The shareholding of the three main shareholders will be parked under Gateway Development Alliance SB (GDA).

At RM11 per share, the offer price is at an all-time high. Before the announcement itself, MAHB’s share price had been trending upwards, rising by a solid 41.3% to RM10.40 in 2024 and almost three times the price seen post-pandemic, which fell to an intra-day low of RM3.92 on March 19, 2020.

Valuation-wise, the offer price at RM11 values MAHB at a staggering price-to-earnings ratio of 37.7 times of last year’s earnings, 2.6 times book value, and 13.9 times its enterprise value (EV) over earnings before interest tax, depreciation, and amortisation (Ebitda).

The offer effectively values MAHB at RM21bil in EV as the company had a net debt of approximately RM2.64bil as at the end of 2023.

While the offer price is attractive judging by historical standards, it may not be so when we compare with Airports of Thailand (AOT), which trades at a very rich valuation of 29.1 times EV/Ebitda, more than 46 times forward earnings and 8.3 times book value.

The question is, can MAHB ever trade at such high valuations given the challenges the main airport terminal, the Kuala Lumpur International Airport (KLIA), is facing?

Only time will tell but without this offer on the table, MAHB’s share price unlikely would have gone up more than 40% this year alone in the first place.

The upside

As KLIA has been judged not to be on par with many of the regional airports, there is indeed plenty of upside. First is the soon-to-be-completed aerotrain project, which has been one of the sticky points for travellers.

Second is the improvement in the baggage handling system, which is known to make passengers wait for longer than usual and third is of course the recent upliftment in landing and parking fees, which are expected to increase gradually in the current “First Regulatory Period” 2024-2026.

There is also an increase in passenger service charges (PSC), effective next month.

The new rates, especially for international travel and new PSC for transit passengers for both domestic and international, however, are not expected to boost MAHB’s topline, mainly due to the elimination of government compensation which is present in the current fare rate.

Most importantly, MAHB had just recently signed a new Operating Agreement (OA) with the government of Malaysia for the next 45 years and up to Feb 11, 2069, for the 39 airports under its care.

This gives added value to MAHB’s business in the form of certainty as well as higher discounted cashflow value of its business.

Let’s face it, airports are big money business and every airport that needs to undergo either an upgrade or expansion will cost a huge sum.

So far, based on news reports, major capex includes the expansion of the Penang International Airport costing some RM1.5bil, upgrading and development plans for the Kota Kinabalu International Airport, the Subang Airport Regeneration Plan, while other states are also pushing for expansion of their flagship airports, like the one in Perak, Melaka, Kota Bahru as well as in Kuantan.

However, plans are also underway for capex to be prioritised under the Loss Capitalisation Mechanism, which will help MAHB focus on what is important for the airport operator.

The offer extended by GDA seems to be more than fair but the market is not biting. First, the offer is subject to many regulatory hurdles as well as shareholders and it is not expected to be formalised if the pre-condition set under the offer is not satisfied or waived by the joint offerors on or before six months from the date of the pre-conditional offer announcement, which is now set at Nov 15, 2024.

As it is, the share price of MAHB did not jump to a price closer to the takeover price but instead fell and was last seen at RM10.02, an 8.9% discount from the offer price.

New MAHB?

For the benefit of doubt, let us assume that this privatisation offer goes through and the new shareholding structure is now in place.

As the new shareholders are having a reset in terms of ownership, effectively the EPF will be buying up more than 20% of MAHB shares it does not already own at a higher price of RM11, having sold about 130 million shares or approximately half its peak shareholding of almost 260 million shares or 15.7% stake in January last year.

Khazanah, being a strategic investor for the government, will be raising its stake from the current 33% level, while the two new shareholders, parking their respective shareholdings will have a fresh entry into the company.

What motivates a private equity fund in a strategic asset like MAHB, is very different than a pension fund or a sovereign wealth fund. Having the right alignment of interest, and expectations of a national asset, where the government retains a golden share, will be crucial for the future success of MAHB.

There is a lack of logic in this privatisation deal as MAHB as a public company will be more transparent and will be able to tap the capital market for fundraising purposes.

More so, the recent changes at the board level with the appointment of Dr Nungsari Ahmad Radhi just a couple of days before the offer announcement and just days after he was appointed as non-independent non-executive director, surely was done for a reason and to ensure that MAHB is on the right track.

The reasoning provided by the joint offerors is not out of the ordinary and they are definitely within expectations, whether MAHB was a private company or a publicly listed company.

For MAHB shareholders, perhaps they will wait out to see if the pre-condition is met, which will then be reflected in the market price and closer to the offer price. Hence, this also means that there is a risk that the offer may not even be formalised.

In addition, as the offer price is also unattractive when compared with regional peers like AOT, will shareholders be merely satisfied at RM11 per share, given the upside outlined earlier?

At the same time, as the offer is at an all-time high price as far as MAHB is concerned and at a relatively rich valuation by MAHB’s historical valuation benchmarks, a lapse of the offer will likely see the share price nosedive.

Seems like the MAHB privatisation offer under the current form is a case of “damned if you do, damned if you don’t”.

Pankaj C. Kumar is a long-time investment analyst. The views expressed here are the writer’s own.