Tuesday, December 11, 2012

Malaysia Airport has a strong case

Generally, I do not really favor a business that largely depends on rent for revenue. This is especially so for Malaysia Airport ("MAB"). I always felt that it is a monopoly and that position itself is no good for business. MAB is a monopoly allright but when comes to competing against other airports around the region it is not. Within Malaysia, it is probably the only player in town (except for Senai, I think).

Over the years, I have to admit that MAB has done very well - depending largely on the rise of low cost carrier business in Asia especially. I looked at MAB more than a year ago - and at that time it was trading close to RM7.00. Felt that it was overpriced although I already liked the business during then.

On the business of airport, the success of MAB is very dependent on Airasia's hardwork. There are expected new competition from Malindo although I am yet to be convinced of it doing well in a market where Airasia is becoming very dominant. If you go to LCCT (low cost carrier terminal) in Sepang, one could not help to be mistaken that the airport is owned by Airasia itself. Such is that amount of traffic Airasia has brought to the LCCT, but the main beneficiary sitting down and collecting toll is MAB. MAB is doing so well to the extent that for the last 8 years, it has not failed to grow - not one year. See below.

5 years performance for Airport from 2007 - 2011
Rewind a few years back, although it may sound easy, the business of managing airports may not seem that simple. Let me bring you back to year 2003. A mediocre management will not be able to grow the revenue as seen in the stagnation of revenue below. Yes, it is probably due to the rise of low cost airlines after 2003 but a good manager will only allow a star player to shine. A poor manager will not be able to spot the talent or allow the talent to be groomed.

4 years performance of MAB from 2000 - 2003
One may point to the quarrel between Airasia and MAB to the extent that at one point of time, there was a threat by Airasia to build its own airport in Nilai but this I think could be a thing of the past.

If you noticed, year 2003 was also a year of change in MAB. There was much changed in focus i.e. on running the airport operations well as it in later years sold off its F1 circuit and the management (as well as government) objectives became much clearer.

The write-up on the left is picked from the Chairman's statement in the Annual Report of MAB, and one could notice that MAB changed its management team mid 2003. Coincidentally, from 2004 onward, MAB's performance started to get better. To me, it is no coincident. There must be something in it.

In a business, it is much harder to convince people that the business or the managers have managed to turnaround or made them a lot better than convince on continuing the steady performances of some companies. This is why, it is much easier to convince that Nestle or Carlsberg will continue to do well than telling investors that there's already a change in performance (to the better) of MAB or a company like Time Dotcom where they have had bad past.

The biggest story in the near or medium term future for MAB though is not all of the above, but KLIA2. Despite all the hoo-hah about the costs overrun (or maybe overly expensive to build), is the potential it may bring. If one google on KLIA2, you would have noticed, the proposed initial retail space itself is more than 4 times the size of the current LCCT. It will be able to accommodate 3 times the traffic of the current LCCT. From there, looking at the growth prospect of Airasia, and bringing in several of its potential competitors, the revenue from KLIA2 is to grow exponential again - pretty much when LCCT opened in 2007 (despite the rush). This time, it is a serious one and KLIA2 will be able to accommodate for more space for the future as long as low cost carrier business continues to grow well. I think it will, as flying be it for business or holiday travel will continue to grow. MAB's business of renting out retail space I foresee will be doing very well too, if one notice the lack of space for retailers in the current LCCT. I am convinced.

On bringing more traffic, one need not be smart to know that Airasia will be planning for more planes as this is where its profits are mainly from. The rush for low costs will naturally allow it to grow - both MAB and Airasia (in fact MAB more due to its monopolistic nature). Look at SIA's sudden focus on regional flights as well as low costs focus in initiating Scoot. More people will fly, no doubt about it.

I am positive on MAB's future as long as it does not do anything stupid - and with that, I have bought some 2,100 units between RM5.29 and RM5.32.


Benson said...

Hi Felicity, will u consider any palm oil stock for now, which is your favourite? Thx lot.

felicity said...

Look for those that already have successful exposure as well as can diversify its position in Indonesia. That is going to be a strong factor moving forward.

Big Sea said...


It seems like between Quality and Bargain, you prefer Quality.

Would you be able to recommend a quality Palm Oil Counter ?

felicity said...

Warren BUffett has this saying, when the tide goes out, only then you would know who is swimming naked.

The current palm oil price is far from crisis level but its low now. I do not know how low can it go. But if one is to pick palm oil stocks, when the price is low, we would start to know who really can make decent profits from the commodity.

Only the ones that are cost effective and have higher yield would be able to compete at continuously high level. Look out for efficient companies rather than those who have large tract of land.

Keat said...

"I always felt that it is a monopoly and that position itself is no good for business."

Hi Felicity, I'm a tad confused by this comment. Isn't a monopoly supposed to be a good thing for businesses?

felicity said...

Well Keat, I think my principle on business (or even investments) is that it shouldn't be a monopoly (which is why in some parts of the world, there is a anti-trust law).

Monopolies are bad for business but could be good for the company itself. One of the reason I do not like monopolies besides the principles is that it allows companies to slack.

Companies that slacked would be finding it hard to compete when open competition occurs. Happened to Telekom Malaysia, Tenaga.

Another thing about companies that relied on monopolistic nature in their business, the pricing of goods / services are dictated by govt. Malaysia Airport is one case - ever wonder why Airasia kept on complaining about the rates.

Well, the rates for MAB are still dictated - anytime a govt can just announce a revised rate.

keano said...

Hi Felicity,

how do you choose which stocks to look at?
Your stocks' preferences stem from all kinds of sectors. Your knowledge and analysis across the sectors are amazing!