By Khairie Hisyam
The growing pains seen in FY14 was evident in the first quarter of 2015 as Malaysia Airports Holdings Bhd struggles with the cost of klia2 and its Istanbul airport. With its share price falling should investors take a chance and come dance with this counter?
Business model: Malaysia Airports Holdings Bhd (MAHB) was born in 1991 after the federal government took over the management of airports from the Department of Civil Aviation. It now runs 39 Malaysian airports, pretty much all in Malaysia barring Syed Mokhtar Albukhary’s Senai Airport in Johor Bahru and Petroliam Nasional Bhd’s (Petronas) Kerteh airport.
However, only 10 are profit making, including the Kuala Lumpur International Airport (KLIA). These subsidise the other 29 airports, mostly rural landing strips in East Malaysia. MAHB said 10% of its net profit goes toward keeping these unprofitable airports running.
Recent years saw MAHB go beyond Malaysian shores. It now has stakes in two Indian airports — 10% in New Delhi’s Indira Gandhi Airport and 11% in Hyderabad’s Rajiv Gandhi Airport.
In October 2014, MAHB exercised its right to take full control of Istanbul’s Sabiha Gökçen International Airport or ISG. The remaining 40% it did not own cost RM1.2 billion and the purchase was completed in January this year.
Shareholders and management: This year will be Badlisham Ghazali’s first full year as managing director after taking over from Bashir Abdul Majid last June. Bashir held the post for 11 out of his 29 years with MAHB and remains advisor to the airport operator.
Before coming to MAHB, Badlisham was chief executive of officer for Multimedia Development Corporation (MDeC) where he was credited with attracting billions of ringgit in investments for the Multimedia Super Corridor (MSC).
According to MAHB’s 2014 annual report, the single largest shareholder as at March 27, 2015 is Khazanah Nasional Bhd with 36.65%. Permodalan Nasional Bhd (PNB), through various accounts, controls 18.9%, while the Employees Provident Fund (EPF) has 11.84%.
Collectively, these three have 59.66% among them. Another 38% of MAHB shares are controlled by 373 shareholders owning 100,001 units or more, of which 223 are foreigners controlling 19%.
Share performance: Over the past year, MAHB shares had fallen by nearly 14%, continuing a general downtrend in 2014 after hitting an all-time high of RM9.08 on Dec 23, 2013 (adjusted price).
The counter is slightly more volatile than average with a beta coefficient of 1.06, according to Reuters data. A value of 1.0 reflects the average volatility of the stock market.
MAHB commits to a dividend policy of paying out at least 50% of net profit as dividends, which it had consistently done since 2007.
However, in terms of absolute payout value dividends in financial year 2014 (FY14) hit the lowest amount per share since at least 2006 as higher costs from klia2 dragged down realised profit by 74% for that financial year. The company hopes to return to normal dividend levels in FY15.
What analysts think: Analysts are mostly cautious on MAHB following its first quarter results announced on May 5, which saw net profit drop by 75% on a surge in depreciation and amortisation costs, general expenses, and finance costs due to klia2 and ISG. This led to a core loss of RM30.9 million, said TA Securities.
Of eight research houses surveyed by KINIBIZ, all except Hong Leong IB retained their ratings on the counter, though most lowered their target prices. The consensus however is MAHB faces a turbulent road.
ISG integration boosted earnings but overall operating expenses rose faster alongside higher depreciation, amortisation, and finance costs. Essentially, weak Malaysian operations are negative improved earnings prospects at ISG, said analysts.
This paints a challenging outlook for MAHB, which struggles with high operational costs at klia2 and ISG at a time when travel sentiment has been hard-hit by recent tragedies, said Kenanga Research.
“1Q15’s (first quarter of 2015) performance is a reflection of the company’s main assets (klia2 and ISG) undergoing their startup phases, whereby they are incurring losses and consuming capital,” said Maybank.
What MAHB needs is time, opined CIMB Research, arguing that MAHB’s profits were squeezed by klia2’s completion – much bigger and more expensive than the low-cost carrier terminal (LCCT) it replaced. This coincided with passenger traffic declining as airlines rationalise capacity to improve yield and a drop in international passengers following air disasters last year.
“While the Malaysian earnings will trough this year, the recovery will slow since Malaysia’s key airlines are planning either capacity cuts or single-digit capacity growth,” said CIMB.
On ISG, analysts agree that it is unlikely to break even this year. UOB Kay Hian believes the Istanbul airport will “pay off” for MAHB and tips ISG to be Ebitda (earnings before interest, taxes, depreciation and amortisation) positive this year.
However, TA Securities is less optimistic, pointing to an unexpected additional amortisation of RM45 million due to the increase in fair value of ISG paid by MAHB. This additional fair value will be amortised throughout ISG’s concession period which will expire in 2030.
“In other words, this additional amortisation cost is a recurring item until the concession expires,” said TA Securities.
On MAHB’s concession term, Hong Leong noted that it hopes to conclude extension talks with the Transport Ministry by end-2015, seeking possibly a 35-year extension which would take it to 2069.
Earnings forecast:
StockStalk: The opening of klia2 in May 2014 decimated MAHB’s FY14 earnings and this last quarter was no different. Integrating ISG did not help — this quarter MAHB absorbed 100% of its losses as opposed to 20% in previous quarters.
However, things are improving in Turkey. MAHB cut ISG’s core net loss by nearly half in 1Q15 and the airport’s revenue growth was a big boost to MAHB operational revenue growth of 33% this quarter. Without ISG contribution this figure would only by 5.3%
Also worth reiterating is ISG’s location in a catchment area housing 40% of Turkey’s gross domestic product (GDP). Its prospects look bright if MAHB can steer it into profitability this year as it aims to do. A big hurdle would be the heavy borrowing costs of fully acquiring ISG, however, which is now dragging down earnings.
Back home things are less encouraging. Recall Putrajaya’s promise not to raise the passenger service charge for klia2 in its first year of operations, which led to expectations of a raise by May this year – an earnings booster. This now seems unlikely with negative public sentiment following the goods and services tax (GST) kicking in from April.
However, MAHB’s investment in klia2 is secure as its main tenant AirAsia is a well-run airline boasting the world’s lowest cost base. In turn, MAHB’s long-term monopoly over airport operations in Malaysia should be reasonably secure given its incumbency as a concession holder and the government, through Khazanah Nasional, being a major shareholder.
Another important development is the ongoing restructuring of Malaysia Airlines, where new boss Christoph Mueller finally took charge in May. The airline’s passengers make up a third of MAHB’s passenger traffic and any drop in volume would directly hit MAHB’s earnings. Analysts previously estimated that a 20% drop in Malaysia Airlines passenger numbers would hurt MAHB revenue by 4%.
Overall, the current turbulence in operating conditions is a bump in a long road forward. The International Air Transport Association (IATA) forecast passenger traffic to hit 7.3 billion in 2034, more than double the 3.3 billion seen in 2014. MAHB’s share remains to be seen but its monopoly over airport operations in Malaysia augurs well.
Last year, MAHB’s passenger movement growth outperformed regional peers such as Changi and Bangkok, which saw relatively marginal growth, and Jakarta, whose volume dipped 4.8% year-on-year in 2014. The growth of the industry is inevitable.
In other words, air travel is the future and the future is now. MAHB is still looking for its groove now but those trees should not hide the forest.
If you’re pondering this counter, easy now. Pause, take a breath and consider your investment horizon.
While there is no telling if MAHB shares have hit the bottom at this stage, over the long term, MAHB shares had generally bounced higher after prolonged troughs. There are many potential catalysts but all long term.
One possible catalyst upward would be any increase in tariffs at klia2, where passengers are only charged RM32 for international departures compared to RM65 at KLIA’s Main Terminal. In turn, the government is topping up this fee to the tune of RM3 and RM6 per pax respectively.
Recall that RM32 was the carry-over rate from LCCT. Given klia2 is a vast improvement overall, an increase is eventual and that would be a big boost to MAHB’s bottom line.
The question however is when, as is the case for the counter’s upward prospects overall. Any further share price dips would be an invitation to hit the dance floor for the long term.
______________________________________________________________________
Important Note and Disclaimer: This article should NOT be taken as a cue to either buy or sell the stock. The intention is to highlight the key factors you might want to think about before plunging in or scrambling out. While KiniBiz makes every endeavour to ensure facts are right and opinion is fair, no liability can be assumed for anyone relying on this information. In other words let the buyer (or seller) beware — a reflection of Bursa Malaysia, we say.
You must be logged in to post a comment.