By Jose Barrock
In the fourth and concluding part of our series on the new low-cost carrier terminal KLIA2 undertaken by Malaysia Airports Holdings Bhd, we look at the feasibility of the airport and what challenges managing director Bashir Ahmad Abdul Aziz may face, now that his contract has been extended for a year.
Bashir Ahmad
As of last week, it seemed pretty clear that Malaysia Airports Holdings Bhd’s managing director Bashir Ahmad Abdul Aziz’s contract which was slated to expire today, on June 7, would not be renewed.
In contrast, by mid-May last year an announcement had already been made to Bursa Malaysia on Bashir’s one year extension, but until late evening yesterday, there had been nothing on his contract being renewed, or of a successor taking over.
“The fact that it was merely a one year extension last year said it all…it didn’t look like they (Khazanah Nasional Bhd, MAHB’s 40% parent) were going to renew (his contract),” one observer commented.
The decision to extend Bashir’s contract was up to Khazanah Nasional, with the blessing of the Minister of Finance Inc which holds a golden share.
Bashir was not exactly the most popular person in Khazanah Nasional, having ruffled some feathers in his 10 years at MAHB.
Azman Mokhtar
Industry officials say that there was some amount of tension between Bashir and Khazanah Nasional managing director Azman Mokhtar, but there is little evidence of this.
Hence while some were looking at Bashir taking the fall, others felt that the responsibility for KLIA2 should be collective and include AirAsia Bhd as well as the contractors, all of whom have to take some blame for the delay.
Insiders also said that the flak Bashir received for pandering to AirAsia Bhd’s wants was justifiable as the budget airline would be KLIA2’s largest customer accounting for up to 90% of traffic at the new airport initially at least.
Leaving Bashir’s one-year extension aside, how feasible is KLIA2?
Feasibility of KLIA2
KLIA2 is at present about 92% complete. The contractors that have fallen behind schedule are the UEM Group-Bina Puri Holdings joint venture which secured a RM997 million job for the design, construction, commissioning and maintenance of the main terminal building of KLIA2, a satellite building, sky-bridge and piers.
While some say that another contractor, KUB Bhd had also fallen behind schedule, the company said that it had not.
Nevertheless the targeted deadline of June 28, 2013 has to be pushed forward, and a more likely date yet to be fixed.
The UEM-Bina Puri joint venture has indicated physical completion by September or October this year, and sources close to the companies indicated a bill of RM200 million for additional work done.
“We think that MAHB will need at least three to four months to complete the remaining 8% outstanding construction works,” Maybank Investment Bank (IB)’s aviation analyst Mohshin Aziz said in a report earlier this week.
He estimated additional costs for KLIA2 to be in the region of RM4.2 billion to RM4.3 billion, including RM300 million to RM400 million in additional costs.
“We estimate that the cost overrun will be limited as a majority of MAHB’s contracts are based on fixed priced project value rather than time-related contracts. This means that the contractors will have to bear the bulk of the cost overruns.
“The KLIA 2 project remains feasible at RM4.3 billion. The additional cost will reduce the project IRR (internal rate of return) by 0.9-ppt to 10.3%, from 11.2% per our previous estimate. The equity IRR will remain at impressive levels of more than 25% due to the high gearing nature of this project. We estimate that KLIA2 will be able to self-finance itself, generate free cash flows and have an estimated payback period of 12 years. This is still an encouraging return rate for a project of this size,” Mohshin said in his report.
However should the costs escalate to the RM4.5 billion to RM5 billion range, the project IRR will decrease to about 9.9% and 8.9% which could adversely impact MAHB’s bottom line in the initial years at least.
“As a rule of thumb, a debt-service coverage ratio of 2 times is considered comfortable and above three times is very healthy, with the ability to pay dividends comfortably,” Mohshin added.
He forecasts MAHB having a dividend yield of between 2.4% and 3.2%, over the next three years.
A good year ahead, issues to grapple with
For its first financial quarter ended March this year, MAHB posted net profits of RM126.06 million from RM1.03 billion in revenue. Earnings per share for the three month period was 10.37 sen.
For the corresponding quarter a year ago, MAHB posted net profits of RM102.73 million from RM657.70 million in sales.
As at end March MAHB had cash and bank balances of RM340 million and on the other side of the balance sheet the company had long-term debt commitments of RM3.1 billion, and negligible short term debts.
The long term borrowings in MAHB’s balance sheet are largely from Islamic debt papers of RM3.1 billion, issued in 2010 and expiring in 2025, which were raised to finance the building of KLIA2.
It is also noteworthy that MAHB has applied to the Ministry of Finance for an investment tax allowance for KLIA2, which will result in lower taxes of RM585 million to RM645 million on a project cost of between RM3.9 billion to RM4.3 billion, analysts say. However, other details remain sketchy.
Earnings should be on an upward trend considering that both Malaysian Airlines System Bhd (MAS) and AirAsia have increased their respective capacities during the first quarter of the year.
According to Hong Leong Investment Bank, MAS has successfully improved its load factor to 76.6% despite the 11.1% year-on-year increase in capacity, while AirAsia’s load factor dropped slightly to 77.9% (still relatively healthy) after increasing its capacity by 11.5% year-on-year.
HLIB expects continued capacity growth in Malaysia for the remaining quarters of 2013, as AirAsia and MAS take deliveries of new aircraft, while the other budget airline Malindo boosts its capacity from two B739s to 12 B739s by year-end, and AirAsia X taking delivery of seven A330s in FY13.
“MAHB is expected to benefit from higher passenger movement (higher airport capacity utilisation or lower average unit cost) through the collection of passenger tariffs and commercial revenues,” HLIB said.
According to UOB, MAHB is slated to increase its landing fees by a 9% quantum over the next two years, a move which may prove to be unpopular.
Issues which Bashir may have to grapple with include MAHB’s charges which are among the lowest in the region, allowing for upward revision.
“The current charges structure is pegged to the CPI (consumer price index) and is only revised every five years. However, there is scope for this to be adjusted given that domestic and international passenger service charges (PSC) are 17% and 30% lower respectively than regional peers,” UOB Kay Hian said in a report released today.
As at end 2012, retail spending at KLIA was 63% lower than that at Changi Airport and 43% lower than at Airports of Thailand. The rental revenue per pax at KLIA was just 12.5% of gross revenue, which is lower than Airports of Thailand’s 15%.
Other than the above Bashir will also have to put things in place for Asean’s open skies which is slated to kick in by 2015.
Identifying a successor
All in, the past few months have been a tumultuous period for Bashir. Since March this year he has indicated that MAHB should find a successor, and that he wants to take a back seat.
Syed Faisal Albar
Thus over the next year, Bashir will possibly identify a successor, and perhaps remain as an advisor to merely guide the new person at the helm.
But in end May this year Syed Faisal was appointed an executive director of transportation and haulage outfit Konsortium Logistik Bhd. Konsortium Logistik is 61.6% controlled by state controlled Ekuiti Nasional Bhd or Ekuinas.
It is not clear if there are other candidates MAHB is looking to groom.
Thus perhaps Bashir with his 30 odd years of experience in the aviation and airline industry is the best man to handle the job, and after this episode, Bashir’s successor is likely to get tips on how to meet expectations, and deadlines.
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