RAM Ratings expects MAHB’s financial profile to recover by FY16

KUALA LUMPUR: RAM Rating Services Bhd (RAM Ratings) expects Malaysia Airport Holdings Bhd’s (MAHB) financial profile to recover by the financial year 2016, driven by possible positive cashflow generation from Istanbul Sabiha Gokcen International AirportInvestmentDevelopment and Operation Inc (ISG).

In a press statement, RAM’s head of Consumer and Industrial Ratings Kevin Lim said, “Although MAHB’s domestic operations are likely to improve, the impact is expected to be mostly negated by the modest cashf low generation of ISG in the near term.

“That said, we expect the Group’s f inancia l prof i le to be restored by FY16. More meaningful cashflow generation from ISG is expected from FY16, which should lift the Group’s funds from operations debt coverage (FFODC) to around 0.2 times then.”

According to RAM Ratings, MAHB’s performance is expected to be subdued in FY14, given sizeable depreciation charges and a more challenging operating environment following the twin f light tragedies and industry capacity cuts within the domestic airline sector.

It added, the group’s pre-tax profit in the first nine months of FY14 dipped by 70.5 per cent year-on-year (y-o-y) due to an unexpected rise in depreciation charges, a higher finance cost (largely due to the recognition of finance cost post completion of klia2) and one-off recognition of ISG’s previously unrecognised losses.

“The losses were brought about by MAHB’s increased ownership of its Turkish investment, ISG (from 20 per cent to 60 per cent) in April 2014. MAHB’s current financial metrics are viewed to be weak for its ratings,” RAM Ratings said.

To recap, MAHB announced that it would acquire the remaining 40 per cent stake in ISG owned by Limak Group at 285 million euros and this acquisition is expected to be funded by a rights issue (with estimated proceeds of around RM1.3 billion) and the capitalraising exercise is expected to be concluded by the first quarter of 2015.

“Upon the completion of the acquisition, ISG will be consolidated into MAHB. While MAHB’s gearing ratio is expected to ease slightly to around 0.8 times postacquisition, the acquisition will dilute its cashf low protection metrics.

“Full ownership of ISG is likely to extend the period of weaker cashflow generation by another two years.

“The group’s FFODC is projected to be suppressed at 0.17 times in FY15 under our sensitised case scenario,” RAM Ratings projected.

Nevertheless, Lim highlighted, “We view the longer term prospects for ISG to be robust, supported by Turkey’s large population of around 75 million, a low aviation penetration rate and favourable demographics.”

RAM Ratings noted ISG’s passenger numbers registered a compounded annual growth rate of 33.7 per cent between 2008 and 2013.

It added, ISG registered passenger growth of 26.2 per cent in 2013 and is on track to maintaining this growth rate in 2014 as ISG’s impressive traffic growth is largely driven by the fast-growing Pegasus Airlines – Turkey’s largest low costcarrier.

RAM Rating reaf f irmed MAHB’s respective global and Asean ratings of gA2/Stable/ gP1 and seaAAA/Stable/seaP1.

Concurrently, it said, the respective AAA/Stable and AA2/Stable ratings of the group’s RM2.50 billion Senior Sukuk Programme (2013/2033) (senior sukuk) and proposed RM2.5 billion Perpetual Subordinated Sukuk Programme (perpetual sukuk) have been reaffirmed.

“We have also reaffirmed the AAA/Stable rating of Malaysia Airports Capital Bhd’s (MACB) RM3.10 billion Islamic MTN Programme (2010/2025) and the P1 rating of its RM1 billion Islamic CP Programme (2 010/2 017),” it added.

RAM Ratings said, the rating reaf f irmation is based on MAHB’s continued strong business position as the sole air por t operator in Malaysia of all 39 airports owned by the Government of Malaysia (GoM).

“The ratings are further supported by MAHB’s strong collaborative relationship with the GoM and the underlying strength of the air t ravel industry.

“Over the last 20 years, air travel g rowth has averaged 1.8 t imes that of global GDP growth. MAHB is also expected to benefit from the robust demand within the low cost- ca r r ier seg ment,” it added.

Aside from that, RAM Ratings said, the senior sukuk’s cred itwor thiness reflects MA H B’s credit prof ile as it ranks pari passu with all of the group’s other senior unsecured borrowings.

“The perpetual sukuk, meanwhile, is rated two notches below MAHB’s corporate credit rating to reflect the risk of deferrable prof it d ist r ibut ions a nd t he deeply subord inated r ight of the sukuk holders to claims in the event of insolvency,” it concluded.