Malaysia Airports Holding Berhad (MAHB) recently caught my attention simply because it has lost over 50% of its market capitalisation over the last 6 months.

The plunge in its share price is understandable given the Covid-19 crisis is crippling air travel in an unprecedented way. In fact, the current price is the lowest in the past 5 years and that prompted several analysts making buy recommendation based on its depressed PER ratio compared to its 5-year-average PER of 60. I can’t help but cringe a little bit because that is pretty much the only reason given. What I’m more interested is whether the company is being undervalued due to panic selling. I’m certainly not an expert in airport management or aviation but decided to do some digging.

I like the business model of airport operation because it has super solid moat due to its monopolistic position. I don’t foresee any replacement for air travel during my lifetime and the barrier of entry is enormous because this is a highly regulated industry. Managing an airport is pretty much like running a small city and the residents keep growing year on year. Even though MAHB is perceived as a private commercial entity, the government of Malaysia still holds 1 golden share which allows it to appoint most of its directors, effectively having huge influence over its major decisions.

MAHB derives around 75% of its revenue (RM3.9bil) from managing 39 airports in Malaysia, pretty much all airports in Malaysia (except Senai Airport) and 25% revenue (RM1.3bil) from managing 1 airport in Turkey. Under the Operating Agreement signed with the government of Malaysia, MAHB is given the operating rights to operate all these airports until 2069. Out of its total revenue (FY19), 95% relates to airport operation while the rest is from non-airport operation such as hotel management, agriculture (palm oil plantation around KLIA) and project services. For airport operation, it mainly generate income from airport services (passenger service charge, landing and parking fees, ancillary charges to airlines, rentals from terminal tenants, car park charges, F&B operation etc). More notably, MAHB also directly operate Eraman Duty Free (largest in Malaysia) which contributed RM850mil revenue (23% of airport operation) in FY19.

Now the main question is what’s the impact of Covid-19 to MAHB’s revenue in FY20 which involves some guesswork. In Feb 20, MAHB alrady reported a 23.4% drop in passenger traffic compared to the same month last year due to Covid-19, but that’s before things got a lot worse and the implementation of MCO with absolutely no flights allowed. Even after MCO is lifted, air travel will take some time to recover because the rest of the world like US and Europe are still in deep shit. It’s reasonable to expect that most people will refrain from travelling for quite a while because the virus could be lurking around and it’s better to be safe than sorry.

Let’s say MAHB’s revenue drops by 50% in FY20 (which is not unlikely), I expect its EBITDA to drop even further by percentage because a large component of its cost should be fixed. Just like a hotel, the incremental cost of serving an additional passenger is minimal. Let’s say EBITDA drops by 70% from RM2.4bil to RM715mil, its barely enough to service its finance cost of RM720mil (FY18: RM756mil). A fall in profit before tax predicted by most analysts could very well be a net loss in my opinion.

Looking at its balance sheet, MAHB has RM1bil of Islamic Medium Term Note (IMTN) maturing on 28 August 2020 which will eat up most of its existing cash pile of RM1.45bil. The balance cash will probably just enough to support its capital expenditure of estimated RM300-400mil (based on average capex in the last 5 years). I think it shouldn’t have problem refinancing its IMTN as its gearing ratio of 73% is still below 125% limit under the existing covenant and it has solid backers on its shareholder register (Khazanah 33.2%, EPF 9.5%, KWSP 2.3%). Alternatively, it can choose to liquidate its RM1.75bil investment in unit trust, which may result in massive loss in the current market condition. Lastly, they can go for a rights issue just like Singapore Airlines’ SGD5.1bil rights issue which will mainly be taken by by Temasek.

MAHB is loaded with quite a huge amount of borrowings, RM2.5bil in FY10 to support the construction of KLIA2 and RM2bil in FY14 to support its Turkish operation. As for KLIA2, I still remember the massive scandal whereby its construction cost has increased from RM1.7bil to RM4bil (a massive overrun of more than 100%). Moreover, the target opening date was delayed 5 times and it finally opened in May 2014, even though the original date was supposed to be Sep 2011 (2.5-year delay). That has pretty much shown the quality of management but I don’t intend to dig into the shenanigans back then and let’s hope that the episode is over, especially with the change of government (twice!). Even the CEO and CFO have been changed several times in the past 8 years with the latest change of CEO just three months ago. With such a management revolving door at the c-suite level, I wouldn’t be surprised with short-term thinking and further rounds of mishaps. Touching on debt, MAHB also has a number of contingent liability in relation to lawsuits and the notable ones are KAF (RM480mil) and Air Asia (RM456mil). I’m not too concerned with that as the relevant cost generally takes quite long to materialise, if it ever does.

MAHB definitely face a huge challenge in the short term but will it fare well over the long term? If it can maintain its performance in the past 5 years, then I’ll estimate a free cash flow of around RM0.35 per share and that should give a value of RM7-8 per share. However, the biggest blind spot right now is the uncertainty over the implementation of Regulatory Asset Based framework by the government whereby the airport tariff can only be increased if MAHB’s return on invested capital (ROIC) is below its weighted average cost of capital (WACC). Well that’s a mouthful of jargon but it essentially will limit the increase of tariff and reduce the revenue upside for MAHB. Additionally, there will also be penalty imposed on MAHB if certain service quality is not maintained. Basically the whole airport business is highly regulated because tariff such as passenger service charge is set by the government and there are tonnes of regulations to be adhered to. There is also this uncertainty over the newly formed government in terms of its competence and commitment in this area, not to mention its own stability.

For that, I believe I should toss this onto the tray labelled “too hard” for the moment.