Business

Saturday December 13, 2008

MMC’s latest RM1.7bil deal irks investors

By JAGDEV SINGH SIDHU


But the company sees good future for Senai Airport

Once again, Tan Sri Syed Mokhtar Albukhary has proposed to flip one of his private assets to a listed flagship company which he potentially stands to gain handsomely from while raising the ire of investors. This time, it involves a deal to sell Senai Airport to MMC Corp Bhd for RM1.7bil cash.

Analysts have been no less vocal about the proposed sale of the airport and the surrounding 1,087.2ha of oil palm estate to MMC. Originally, when it was announced in August, it was proposed that MMC would issue 696 million shares at RM2.80 each to buy Senai Airport Terminal Services Sdn Bhd (SATS) for RM1.95bil.

Hasni Harun

The market didn’t conceal its protest and MMC shares, which were suspended for the announcement, plunged 22% to RM2.12 the following day when they resumed trading.

Over the week, when MMC revised the terms into a cash deal with a value of RM1.7bil, it almost seemed like deja vu but this time, the counter took a smaller beating as the stock was already at a multi-year low.

“People did not like the deal when it was first announced. Now the deal is changed to all-cash and it’s even worse,’’ says a fund manager.

To add insult to injury, a few days later, MMC announced that it was selling a minority stake in its prized asset Port of Tanjung Pelepas (PTP) to fund the acquisition of Senai Airport and the surrounding land.

MMC says it was in an advanced stage of negotiations on the stake sale and the likely buyer is Khazanah Nasional Bhd or the Employees Provident Fund.

“The premium paid for SKS Power or even PTP can be justified. Cashflow and profits from Tanjung Bin could be seen because of the power purchase agreement with Tenaga Nasional and PTP’s potential was there when the deal was made,’’ says the fund manager, adding that: “Land is not the same as a power project.’’

Essentially, the hardest part to swallow in the Senai Airport deal is that in buying a loss-making business, MMC needs to sell a piece of its profitable business.

For the year ended June 30, SATS posted an unaudited loss of RM24.8mil on revenue of RM28.8mil. In contrast, according to a report, PTP posted a pre-tax profit of RM148mil for its 2007 financial year.

MMC defends the deal

While investors, analysts and fund managers have poured scorn on the deal, MMC believes it’s a commercially justifiable deal.

“MMC’s acquisition of SATS is a strategic fit as the airport provides us with a competitive advantage in our transport and logistics businesses, as one of MMC’s core pillars,” says MMC CEO, Malaysia, Hasni Harun in an e-mail reply.

Breaking down the acquisition, Hasni says SATS will complement PTP and Johor Port, which have been operating since 2000 and 1976 respectively, and enables MMC to expand its transport and logistics businesses into the area of air logistics, in addition to the company’s existing port operations and land-based logistics activities.

An artist’s impression Senai Airport’s Aero Mall, which is scheduled to be completed at end-2009

He also envisages the airport playing a major role in the transport and logistics sector within Iskandar Malaysia as about one million TEUs of Malaysian cargo go through Singapore annually.

Hasni says the acquisition cost of SATS was also reasonable as the airport was acquired in the early stage of its growth cycle. The valuation of RM387 per passenger, based on the flow of 1.5 million passengers, is much lower than the historical airport transactions average of RM680 per passenger.

SATS’ performance, he adds, was comparable to Malaysia Airports Holdings Bhd on a revenue per passenger and earnings before interest, tax, depreciation and amortisation (EBITDA) basis (RM19.76 versus RM25.91 and RM5.89 versus RM6.15).

While there has been doubts over the high price of the freehold land around SATS which was acquired at RM9.45 a sq ft, Hasni points out that independent research has put that valuation to be cheaper than big tracks of land in other major business/development areas in Johor such as Nusajaya, PTP, Tanjung Langsat and Pasir Gudang. The long-term lease rates at Nusajaya was RM30 to RM35 per sq ft and at Pasir Gudang, it was between RM16 and RM18 per sq ft.

“The completion of the RM93mil Aero Mall by IJM at the end of 2009 will increase retail space four-fold to 8,500 sq m, providing potential for higher non-aeronautical revenue,’’ he says.

Aiding the development of SATS will be the potential growth of non-hub services arising from market liberalisation, the rise in traffic from the low-cost carriers, and the increase in point-to-point services.

“The airport’s capacity of four million passengers per annum against traffic of 1.5 million leaves ample room for growth without additional capital expenditure,’’ he says.

The completion of the runway extension to 3.8km by the first quarter of 2009 will allow fully-loaded long-haul aircraft and the largest planes, such as the Airbus A380, to land at Senai.

Hasni says ebitda margin has improved to 30% in 2008 from -8% in 2006 and is poised to increase above 50% with full impact of airport upgrading, cargo revenue and Logistics City.

Logistics City is an ambitious plan by MMC to convert the land around the airport into high-tech, cargo and logistics parks and a Customs, Immigration and Quarantine complex that would also have commercial and residential buildings. The gross development value of Logistics City is forecast at RM9.5bil.

Infrastructure costs could be offset against future land sales.

MMC says the Government has allocated funds to develop SATS’ cargo business and has committed to give incentives to MMC, like those currently enjoyed by several sectors in Iskandar Malaysia’s Node 1.

With such plans in store, Hasni says SATS has the potential to become a cargo hub for Iskandar Malaysia within 5 years.

MMC also defended its track record from previous related party transactions, saying it has created shareholder value over time.

Hasni says the value creation from acquisition of PTP and Johor Port (including the Tajung Bin land) is RM4.8bil, or RM1.58 per share, against investment cost of RM3.5bil.

“MMC has enhanced PTP and Johor Port’s net profit by a compounded annual growth rate of 15% and 16% respectively since the acquisition,’’ he says.

 
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