Internalising Of Management Creates Little Value For Macquarie Airports

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The company is included in ASX20, ASX50, ASX100, ASX200, ASX300 and ALL-ORDS

By Chris Shaw

Having paid out millions upon millions in fees and other associated charges to parent Macquarie Bank ((MQG)), Macquarie Airports ((MAP)) is now making a payment of $345 million to the bank to internalise its management, a move seen as being of more strategic value than actual value for the company.

As GSJB Were points out, the deal removes a potential conflict of interest surrounding the stock and so may open it up to new investors, as there had been some previous resistance to buying in given Macquarie Bank had management control and was perceived to be pursuing its own interests.

But the issue won’t go away that easily in the view of Deutsche Bank, who argues that as the internalising of management requires Macquarie Airports to give Macquarie Bank the payment in shares, the latter’s stake will increase to 27.3% from around 21% previously, meaning questions of independence are likely to linger. There could also be something of a perceived stock overhang, GSJB Were noting the market is unlikely to take the view Macquarie Bank will remain a long-term holder of the shares it owns.

According to RBS Australia the internalising of management will have little in the way of a valuation impact on Macquarie Airports as while costs come down the increase in shares on issue dilutes the benefits to a more of less neutral outcome.

So the key becomes relative value and here the numbers are not so impressive, largely given the strong run in the stock of late that has seen it gain more than 40% over the past quarter. This equates to a gain against the market of around 30%.

At the current share price level GSJB Were argues the group’s EV/EBITDA (enterprise value to earnings before interest, tax, depreciation and amortisation) multiple is excessive, especially when compared to peers. The broker estimates the MAP multiple at around 15x, while Australian Infrastructure Fund ((AIX)), which is also largely an airport play, has an EV/EBITDA multiple of around 9.6x at present.

The broker also suggests there are ongoing concerns within the MAP portfolio with respect to recapitalisations of both the Brussels and Copenhagen Airports, which means some downside risk to distributions in the coming year or so. These risks, on the back of the recent share price gains, have seen the broker downgrade to a Hold rating from Buy previously.

Credit Suisse has made a similar downgrade as with the internalisation outcome likely below market expectations given no additional value was created it continues to see asset sales as the main driver of reducing the gap between the current unit price and estimates of fair value. Given such an expectation the broker sees better value in Macquarie Infrastructure ((MIG)) and Transurban ((TCL)) at present.

UBS is similarly cautious, pointing out Macquarie Bank’s increased stake is likely to either be viewed as a controlling stake or as a stock overhang, so either way there is little reason to own the stock at present in its view.

But RBS Australia remains positive, noting even while the stock has run of late the yield at current levels remains impressive at better than 8.5%, while the company itself is well placed to benefit from any recovery in the global economy and rates of air travel, something the broker expects will happen in 2010.

As well the broker notes earnings to date have proven to be fairly resilient, as the latest Sydney Airport result showed tight cost controls and higher property charges allowed EBITDA to increase modestly despite a small fall in traffic numbers in the first half of this year.

Deutsche Bank doesn’t see much change in terms of earnings from the internalisation move but it sticks to the view the stock offers value at current levels given its valuation-based price target of $3.50, down from $3.60 given the dilution from additional shares, remains well above the share price.

For Macquarie Group itself, Citi expects the internalisation of management at Macquarie Airports is likely to be followed by similar moves in the group’s other listed satellites and this won’t be such a bad thing as while ongoing fees would fall these would be offset by profits booked against mark-to-market holding levels.

JP Morgan expects the bank will eventually sell its stake in MAP, but points out it remains far too early to try and determine what price it might achieve on any exit. There will be a minor earnings impact from the internalisation move but the broker has made only small changes to its estimates and price target as a result. Other brokers have similarly made only minor changes to their numbers, the trend being to increase estimates for FY10 but lower them in both FY11 and FY12.

Post news of the deal the FNArena database shows Macquarie Airports is now rated as Buy four times and Hold four times, compared to a 6:2 split previously. The average price target on the stock is essentially unchanged at $2.79. Macquarie Group itself is now rated as Buy twice and Hold seven times with an average target of $38.49. This s up from $36.70 primarily on the back of RBS Australia lifting its target to $40.22 from $30.57 given a change in its valuation approach.

Shares in Macquarie Airports today are weaker and as at 12.00pm the stock was down 10c or 4.1% at $2.36, which compares to a yearly range of $1.305 to $3.28. Macquarie Bank shares are higher in contrast, trading up $1.73 or 4.3% at $41.73. Over the past year the stock has moved between $15.00 and $55.90.

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