Target RM7.20 (Stock Rating: HOLD)
AIRPORT (5014) MALAYSIA AIRPORTS HOLDINGS BHD
Surprisingly, MAHB said that it was reconsidering its long-held objective of defending its AAA credit rating status, which suggests that it was possibly open to a wholly/majority debt-funded acquisition of another 40% of Istanbul Sabiha Gokcen (ISG). This is positive because it means that there will be less dilution from the issue of new ordinary shares, and the overall WACC can be lower. We maintain Hold rating and our DCF-based target price. Downside risk to the share price is limited, but weak traffic growth and KLIA2-related costs are likely to lead to uninspiring results in the coming quarters.
What Happened
MAHB hosted their conference call on the proposed purchase of 40% of ISG this evening. Key highlights are as follows. (1) The company did not want to commit on funding choices, but said that it will likely drawdown its existing credit lines to fund the RM1.2bn (€285m) acquisition. (2) MAHB did not comment on whether an equity issue was being planned, and did not want to comment on whether Khazanah will participate in such an event. (3) MAHB was open to divesting part of ISG after adding value in the future, e.g. waiting for the second runway to be operational. (4) Separately, ISG may be able to reduce its interest cost from 10% to 6% from next year, with the debt refinancing negotiations already at an advanced stage.
What We Think
Interestingly, MAHB said that it was reconsidering the wisdom of conservatively sticking to its gross debt-to-equity threshold of 100%, which is needed to retain its AAA credit rating status. If MAHB is willing to give up its AAA rating status, the ISG purchase can be funded almost entirely via debt. In our view, this means that the issue of sukuk (both perpetual and/or senior debt) is very likely. MAHB has a remaining sukuk facility of RM2bn, and investor demand has been strong. RM1bn will be issued to fund KLIA2 and to refinance short-term borrowings, while another RM1bn will be available for the partial funding of the ISG purchase. With more debt funding, less equity will be needed, hence mitigating any potential dilutive impact.
What You Should Do
Maintain Hold. Our base case valuation of ISG at €620m for the whole company, is 13% lower than the price MAHB has agreed to pay for the last 40% block, but this gap will be narrowed down to 7% if borrowing costs are successfully reduced. Our bull case valuation is about 22% above the agreed purchase price, but may be challenging to realise.
Source: CIMB Daybreak - 27 October 2014
