something fishy with mig and map, page-9

Monday, 21 July 2008
Data as at Monday, 21 July 2008

Recommendation
--------------------------------------------------------------------------------
Recommendation: Outperform
volatility index: low/medium

Investment Fundamentals
--------------------------------------------------------------------------------
code: MAP AU
stock price: $2.45
volatility index: low/medium

year end 2007a 2008e 2009e 2010e
reported e $m 2,695.50 536.83 1,461.45 1,130.47
adjusted e $m 1,028.53 163.70 266.19 216.64
gross cashflow $m 1,028.53 163.70 266.19 216.64

cfps c 59.85 9.52 15.49 12.61
pgcfps x 4.09 25.72 15.82 19.44

eps adj c 59.85 9.52 15.49 12.61
pe x 4.09 25.72 15.82 19.44

dps c 31.00 27.00 28.00 29.00
yield % 10.61 11.02 11.43 11.84
franking % - - - -
ev/ebitda x 1.43 6.31 2.58 3.31

MAP AU vs. All Ordinaries
--------------------------------------------------------------------------------

Short term recommendations:
O Outperform, N Neutral, U Underperform

Source: ASX/Reuters & Macquarie
--------------------------------------------------------------------------------
All figures in AUD unless otherwise stated.
Macquarie Airports
Recommendation downgraded, Earnings downgraded

--------------------------------------------------------------------------------
Stock: MAP AU
Volatility Index: low/medium
Recommendation: Neutral


Event

Macquarie Airports (Map) has reported Sydney's December quarter result. Sydney second quarter was $156.9m, but once adjusted for the $4.8m one off revenue item, the quarterly result of $152.1m was in line with our expectation of $151.9m.

MAp reported its June traffic.

Impact

The quarterly results including all proportionally consolidated airports are forecasted at $246m, and the core airports of Sydney, Brussels and Copenhagen $228.9m. On a like-for-like basis core earnings before interest, tax, depreciation and amortisation growth is anticipated to be 11%, above the +10% target management has. Sydney is consistent with this expectation.

However, MAp's quarterly results are likely to be a side event. The focus is on the outlook. QANTAS/Jetstar international growth dropped from 5.0% to -0.6%, Virgin Blue's domestic growth has dropped from 18% to 6% for 2009. This is placing significant pressure on Sydney's growth outlook (we are now forecasting flat growth). At Brussels Jet Airways has delayed the start up of the additional services as the US has economically slowed down. We can only suspect there is pressure on European carriers as volumes slip at this airport. The risk is additional capacity is idled, again impacting growth. The same can be said for Copenhagen.

As a result, we have looked at MAp relative to its global peers moving away from solely an net present value, but also an enterprise value to earnings before interest, tax, depreciation and amortisation metric. While the approach has its problems in a period where there is a perceived level of earnings uncertainty, relative metrics are useful. Currently the European airports are at 8.2-9.0 times, we would justify MAp's assets to trad at the higher end of this range. Sydney's multiple is likely to be at a premium of Auckland's 11.0 times reflecting at the very least its superior tax structuring i.e. 14-15 times. Taking this approach is to take a hatchet to our target price, suggesting $1.97-2.22 per share as a relative fair value.

Earnings revision

We have downgraded MAp cash earnings by 2.1% in 2009 and 2.2% in 2010 due to the deferment of our expectations of retail improvement.

Price catalyst

12-month price target: $2.22

Catalyst: Improving fuel price outlook.

Action and recommendation

In the current environment, MAp is likely to find it harder to justify trading at a large premium to its peers. Our net present value is well above the relative valuation, but that is also true for the other airports. Even when MAp is given a premium to other airports because of its structure, an enterprise value to earnings before interest, tax, depreciation and amortisation multiple of 12.2 times is justified, which is well ahead of our 13.1 times. Thus, we have lowered our recommendation to Neutral.