Tuesday, September 17

Strong 2Q for airports, but tamer second half expected

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KUCHING: While analysts anticipate a strong second quarter (2Q) for airports under the purview of Malaysia Airports Holdings Bhd (MAHB), they believe the second half of 2017 (2H17) will be tamer in terms of passenger volume.

With indicative figures showing a 12.6 per cent rise year on year (y-o-y) between April and May this year for airports, AllianceDBS Research Sdn Bhd (AllianceDBS Research) believed that 2Q17’s increase would be even higher – as June 2016 was the weakest month of 2016, especially for international traffic.

“However, double-digit growth is less likely to persist for the remaining 2H17 as 2H16 enjoyed a higher base – it had risen nine per cent y-o-y, compared to two per cent for 1H16,” the research house said.

According to AllianceDBS Research, while Istanbul Sabiha Gokcen’s (ISG) first five months of 2017 (5M17) pax growth was marginal at 0.6 per cent, investors have positively interpreted the turnaround of its international traffic since March 2017, and April to May 2017 numbers were up four per cent y-o-y as a result.

The research house noted that this is necessary as the 2Q to 3Q peak travel season is needed to push full-year growth into positive territory.

However, AllianceDBS Research retained some caution as disclosed aircraft movements for 5M17 were down seven per cent y-o-y, and indicative seat capacity for 2H17 remains below 2015 to 2016 as per Centre for Asia Pacific Aviation (CAPA) data.

“This suggests that airlines serving ISG may have a less-than-positive outlook with regards to near-term passenger traffic growth,” it said.

AllianceDBS Research highlighted that news had emerged earlier this year that external parties were interested in ISG, with reports citing Turkey’s TAV Airports Holdings (TAV), operator of the Istanbul Ataturk Airport, as an interested party.

The research house noted that MAHB has come out to say that the group remains committed to developing ISG, highlighting the works to expand its capacity to 41 million pax per year (from 31 million currently), which will incur more than RM100 million of capital expenditure (capex).

“However, they are “not averse” to explore avenues, including other partners, to enhance the business and operations at ISG – implying a partial stake sale is not out of the question,” the research house said.

“Recall that MAHB accumulated its whole ownership of ISG (and lounge/hotel operator LGM) via two 40 per cent-stake purchases (one each in 2014 and 2015); we think the group would be willing to consider a divestment of up to 40 per cent as well.”

From the group’s previous transactions, AllianceDBS Research found that MAHB’s 40 per cent stake purchases (announced in December 2013 and October 2014) were made at 9.2 to 12.5-fold equity value (EV)/earnings before interest, tax, depreciation and amortisation (EBITDA).

However, the research house  the potential valuation multiple MAHB may achieve today would be lower than that range, as it will be for a non-controlling stake and ISG’s near-term growth and recovery outlook are less rosy than before.

It noted that over the past year, MAHB’s peer TAV has also been trading at seven to nine fold EV/EBITDA.

“A key benefit of a partial sale is that MAHB can lock in gains from the ringgit’s depreciation versus the euro – it is 15 per cent weaker at the current circa 4.90 level, compared to 4.15 at the time of its final 40 per cent stake purchase,” the research house said.

“Even at the same absolute euro price (285 million euros), MAHB would theoretically see more than RM200 million of gross gains from that 40 per cent stake.”

AllianceDBS Research opined that a stake disposal would still be contingent upon further improvement in the Turkey operations, in terms of financials as well as passenger growth.