AOT launches pre-marketing

High growth forecasts may drive premium valuation for Thailand''s airport operator.

Pre-marketing began yesterday (Monday) for an IPO by the state-owned Airport Authority of Thailand (AOT). Led by Phatra Securities, with Credit Suisse First Boston and Merrill Lynch as international lead managers, the government will divest up to 30% of the group's issued share capital (including greenshoe) through an all new share deal. There are no other international syndicate members.

Following two weeks of pre-marketing, formal roadshows are scheduled to begin in Bangkok on February 9, with the international portion of the deal slated to price on March 1. This is likely to comprise 40% to 50% of the total offering, with the government initially targeting proceeds of up to Bt15 billion ($383 million). In a statement issued yesterday, however, the Thai Ministry of Finance said it hoped strong demand may result in proceeds of up to Bt21 billion ($537 million).

The deal was originally scheduled to come to market in the autumn of 2002 and has been resurrected after a spectacular performance by the Thai stock exchange during 2003. All involved are now hoping that recent share price weaknesses resulting from escalating concerns about bird flu will prove short-lived.

Thai Airways, for example, dropped 4.6% in Bangkok yesterday (Monday) after Thailand suffered its first human fatality. But analysts generally have a bullish view for the regional aviation industry during 2004 and many believe bird flu will not pose the same threat to the industry as SAR's did in 2003.

The syndicate has assigned a fair valuation for the company spanning a 2004 EV/EBITDA range of roughly 10 to 14 times and a P/E multiple in the low teens. Even after assuming a 10% to 20% IPO discount, the deal is likely to price at a premium to the global sector average, but will probably come at a slight discount to Asian comparables such as Beijing Capital International Airport.

In EV/EBITDA terms, the global sector averages about 10 times, while Beijing Capital is trading at roughly 11 times. Observers believe AOT deserves a premium because it is forecasting annual EBITDA growth of about 14% over the next five years compared to a 7% sector average.

Achieving this valuation hinges on investors' view of Thailand's new international airport, the $5 billion Suvarnabhumi Airport, due to open in September 2005. During roadshows management are likely to face a barrage of questions about the airport, which has been 40 years in the making, but continually plagued by delays and disputes.

In AOT's favour, the Transport Ministry overhauled the composition of its board last autumn, reducing the number of armed forces representatives from six to three. Prime Minister Thaksin Shinawatra has also taken a more active role pushing the construction timetable of the new airport, not least because his own airline, Thai AirAsia, stands to benefit.

Under current plans, once the new airport opens extra capacity will free up at the existing airport, Don Muang, which can then serve as a hub for the region's burgeoning no-frills carriers such as AirAsia. AOT is also examining plans to expand its domestic network to help develop low cost travel.

Landing fees at privately operated domestic airports tend to be too high to make low cost airlines economical. A case in point is Koh Samui, whose airport was built and run by Bangkok Airways. The government recently said it plans to spend Bt600 million building a new airport on the island to foster competition and better prices for travellers.

Currently 90% of AOT's income is derived from Don Muang Airport, with the remaining 10% from its four domestic airports in Chiang Mai, Chiang Rai, Phuket and Hat Yai.

AOT also needs the new airport to wrest back its role as a regional hub for long haul European travellers en route to South East Asia. Over the past few years, a number of international airlines have de-camped to Singapore because of concerns about slow progress building the new airport. With Don Muang running at full capacity, growth has been flat.

In 1999, for example, Don Muang reported annual passenger volume of 33.5 million and 215,647 flights. In 2002 this had fallen to 31 million and in 2003, 30 million passengers and 200,000 flights. It currently ranks third behind Japan and Hong Kong as Asia's busiest passenger airport, with Beijing Capital coming in fourth. In terms of aircraft movements it ranks fourth behind Beijing Capital.

The new airport has capacity for 45 million passengers and can be expanded up to 100 million. Construction off the terminals is now due to be completed by December, with commercial testing scheduled for March to June 2005 and a grand opening at the end of September.

As well as increasing capacity, the new airport should boost non-aeronautical revenues. Airports in developed economies tend to derive at least 50% of their revenues from this source. AOT currently reports a 39% level, of which 25% comes from concessions, 38% from passenger service charges and 20% from landing charges.

It hopes to boost income from concessions, having previously reduced its revenue sharing arrangements in the wake of 9/11. Passenger service charges are also set to increase as the government raises the international departure tax from Bt500 to Bt700 per passenger.

Bankers see upside from the growth of the no-frills industry and the return of transit passengers to Bangkok. They also see limited downside given the strength of the Thai tourism industry. The country regularly ranks among the top three most visited in the region. As a result, 90% of international arrivals are tourists and 80% of AOT's traffic constitutes O&D passengers (origin and destination).

As one observer concludes, "AOT is a great way to play the Thai tourism industry. It's hugely important to the Thai economy, but represents only 1% of the stock exchange's market capitalization."

Other regional airport operators such as Beijing Capital and Malaysia Airports tend to pay a dividend averaging about 2% to 3%. AOT has not yet made a final decision whether it will follow suit.

The government is currently debating the merits of a dividend versus early re-payment of debt. From a net cash position in 2003, AOT will see gearing increase to 100% by 2005 once the airport opens. By contrast, the world's largest airport operator BAA will see gearing hit the 40% level after terminal five is constructed at Heathrow.

"Airports run through four cycles," one banker comments. "In stages one and two they increase and optimize utilization. In stage three they build new capex and in stage four they utilize it. AOT is presently coming to the end of stage three and poised for its next phase of expansion."

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