This article first appeared in The Edge Malaysia Weekly on December 16, 2024 - December 22, 2024

LAST week, Public Accounts Committee (PAC) chairperson Datuk Mas Ermieyati Samsudin said during a press conference in parliament that it would be investigating sovereign wealth fund Khazanah Nasional Bhd’s controversial deals as part of its schedule for next year, including the proposal to take Malaysia Airports Holdings Bhd or MAHB (KL:AIRPORT) private. “The proceedings will take place between Feb 3 and March 6,” she added.

To recap, Khazanah, together with the Employees Provident Fund, New York-based Global Infrastructure Partners (GIP) and the Abu Dhabi Investment Authority (ADIA) — collectively known as the Gateway Development Alliance (GDA) — had sought to take MAHB private at RM11 per share in mid-May.

Since then, a number of parties have questioned the proposal, including a number of minority shareholders who are said to have made overtures to the PAC to initiate an investigation. The Edge managed to get hold of some of the minorities’ grouses and got GDA to respond to them.

1. Is it true that GIP had been the preferred partner for MAHB as far back as 2017, and other global funds it seems are alleging that Khazanah did not run a process to pick any other investor partner who may be more suitable from a credentials standpoint to invest in MAHB? It is alleged that the entire selection of the partner, GIP, was done in a very clandestine manner. Can you comment?

The proposal to take MAHB private was initiated by GDA with the objectives of upgrading and modernising MAHB operations, improving passenger experience, enhancing the efficiency of Malaysia’s airports and investing for growth across the MAHB network.

GIP’s inclusion in the consortium stems from a comprehensive evaluation of potential technical partners, including top global airport operators. Since MAHB is a publicly listed entity and any speculation about a transaction of this nature could affect its share price, the selection of a technical partner was conducted discreetly by the Malaysian members of the consortium.

This approach aligns with the common practices for transactions involving public companies. The selection criteria included strong governance, a strong demonstrable record of successful airport ownership, tangible operational improvements and value creation and, importantly, alignment of interest with the Malaysian members of the consortium.

An external adviser was brought in to validate the process.

GIP brings to the consortium a demonstrable track record of leading airport transformations, as it has done at its other airport investments such as Sydney Airport, Gatwick Airport and Edinburgh Airport.

GIP demonstrates significant expertise in improving airport operations, evidenced by markedly improved service levels, increased operational efficiency, significant capital investment and strong passenger growth at the airports in which it has invested.

Lastly, GIP (like most private equity managers) will eventually exit its investment.

A wholly-owned subsidiary of ADIA has joined the consortium, adding significant financial capabilities. ADIA has extensive experience investing in and supporting the growth of airports, as it did alongside GIP at Gatwick Airport in the UK. Consistent with the other consortium members, ADIA’s strategy focuses on long-term value creation.

2. Is the offer at RM11 a low ball offer, and is there any possible cohesion on the part of Khazanah, EPF and GIP? It is alleged that the fair value to acquire MAHB’s shares should be more than RM16 per share at the very least?

We reiterate our view that the offer price of RM11 provides a compelling premium of 49.5% year to date (YTD) relative to the RM7.36 closing share price on Dec 29, 2023, which compares to just 10% YTD performance for the FBM KLCI. This offer price is higher than any price that MAHB has ever traded at and nearly all sell-side analysts have published target prices equal to or below RM11. As at Dec 29, 2023, brokers had an average target price of RM8.12 and MAHB’s share price stood below RM8.

On valuation metrics, the offer reflects an EV/adjusted Ebitda multiple of 13.9 times and a price-earnings multiple of 37 times based on MAHB’s financial performance for the fiscal year ended Dec 31, 2023. Specific attributes and circumstances of the airports need to be considered when weighing peer multiples with other airport transactions. Airports, as with other companies and assets, are valued differently due to a multitude of factors, including profitability, growth prospects, passenger mix, regulatory framework and stability, and macroeconomic factors.

In 2019 (pre-Covid), MAHB’s average EV/Ebitda multiple was approximately eight times. Sydney Airport and Airports of Thailand (AoT), in comparison, attracted a higher valuation multiple than MAHB due to, among other reasons, stronger business model and higher cash distribution to shareholders. In 2019, Sydney Airport’s Ebitda margin (a strong measure of profitability) was 81% and it had a dividend yield of 4.5%. This compares to MAHB’s 44% and 1.9% respectively.

AoT’s passenger numbers have grown faster than those of MAHB. AoT’s total passenger numbers grew at a compound annual growth rate of 9% between 2013 and 2019, compared to MAHB’s Malaysia operations of 5%.

3. The valuation of the Turkish airport, Istanbul Sabiha Gokcen International Airport (ISGA), in the privatisation is not accurate as MAHB’s concession, which is slated to expire in 2032, will likely be extended by a 15-year quantum as MAHB is doing a good job. Also, hidden assets and expansion were not taken into account, such as the real estate development of KLIA Aeropolis (the land surrounding KLIA), the Subang Airport Regeneration Plan, organic growth from the expansion of Penang International Airport and potential expansion of Kota Kinabalu airport.

ISGA is another factor which impacts MAHB’s valuation. While it is true that ISGA has experienced substantial passenger and revenue growth, it has not generated any dividends for MAHB despite the approximately RM2.5 billion that MAHB has invested in ISGA since 2008 (in fact, MAHB has written down 20% of its investment in ISGA).

MAHB’s persistent operational issues also weigh on its valuation. MAHB requires significant operational improvements and capital investment to turn around its performance. MAHB only invested RM1.3 billion in capex in the last five years compared to Changi’s RM18.9 billion, RM8.1 billion by Indonesia’s Angkasapura I and II and RM6.8 billion by AoT.

The government has highlighted that MAHB requires approximately RM10 billion in investments over the next five years — more than seven times the amount invested in the previous five years — to remediate existing assets, deliver delayed capital projects and expand capacity at key airports. This will stress MAHB’s balance sheet and constrain its ability to pay dividends.

We are confident that a privatised MAHB under our consortium will better position the company to unlock its growth potential. With our combined resources and full control of the board and company, the consortium is uniquely equipped to expedite necessary capital investments and provide the technical expertise to achieve these goals. Unlocking the growth potential of MAHB will require heavy investments and time to recoup returns, and this may impact cash flow distribution to shareholders in the near term. The consortium, which comprises investors with patient capital, is best placed to undertake the revitalisation of MAHB. We look forward to working closely with the aspiring talent at MAHB committed to restoring its competitive edge — by ensuring talent is properly rewarded in alignment with their contributions and achievements.

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