MAHB to own 100% stake in ISGA

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Malaysia Airport Holdings Bhd
(Oct 24, RM7.05)
Maintain “reduce” with target price (TP) of RM6.20:
Malaysia Airport Holdings Bhd (MAHB) via its wholly-owned subsidiary Malaysia Airport Cities Sdn Bhd announced that it had exercised its right of first refusal in relation to TAV Havalimanlari Holdings AS’ (TAV) offer to acquire the 40% stake in Istanbul Sabiha  Gocken Airport (ISGA) at €285 million (RM1.2 billion).

Post the acquisition, MAHB will own 100% of ISGA. Upon the acquisition, MAHB will have to consolidate ISGA’s debt (€420 million as at Dec 31, 2013), as well as raise €285 million in funding. However, the funding details have not been finalised.

Assuming full debt funding, ISGA’s debt consolidation as well as estimated acquisition-related expenses of RM47 million, MAHB’s gross gearing level would increase to 1.22 times (higher than our earlier estimate of 1.18 times). Total debt level will increase to RM6.9 billion (from RM3.8 billion currently). The proposed acquisition is expected to complete in the first quarter of 2015 (1Q2015).

Given that MAHB has to comply with the debt covenant of a 1.25 times gross gearing ratio and a gross gearing ratio of 1.0 times to maintain its AAA rating, we believe funding will likely be done through a mix of bank borrowings and capital market transactions (private placement and/or rights issue).

For now, we make no changes to our earnings forecasts or our “reduce” recommendation. Our 12-month discounted cash flow-based TP of RM6.20 (weighted average cost of capital 4.9%; terminal growth rate 5.1%) is also intact.

Derating catalysts include: i) earnings dilution from potential capital exercises, ii) potential downgrade in MAHB’s AAA rating, and iii) softer-than-expected traffic growth in the 1Q2014 for Malaysia operation and iv) earnings downgrade — ISGA recorded a net loss of €55 million in 2013. — Affin Hwang Investment Bank Bhd

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This article first appeared in The Edge Financial Daily, on October 27, 2014.