27 July 2005MAP: Compelling Value Triggers UpgradeMacquarie...

27 July 2005

MAP: Compelling Value Triggers Upgrade
Macquarie Research Equities (MRE) have upgraded recommendation on Macquarie Airports (MAp) to Outperform. Since the Sydney Airports result last week, MAp's share price has fallen by 15c to $3.25, down 4.6%, despite the Sydney result being in line with expectation. Over the same period the market has increased 1.5% along with the rest of the infrastructure sector.

At current share prices MAp is attractive. Its EV/EBITDA is now at a more moderate level of 14.9x which is a discount to Auckland Airports at 15.6x (adj for December). Such a discount is the first for some time. Against the Australian retail property sector MAp EV/sustainable cashflow is 16.0x, which is now at the lower end of this spectrum of 15.6-19.0x, again suggesting value.

The outlook is attractive for MAp. Brussels and Rome should both deliver a strong result with EBITDA growth of 28% and 12% respectively for the half, both well above passenger growth with the driver being cost reductions and retail/car parking refinements. Beyond this immediate news, Rome Airport is likely to complete the sale of AdR Handling and ACSA. The release of funds will precipitate a special dividend for investors. Additionally, Rome's aeronautical regime is likely to be determined in the next five months. The reset should facilitate an earnings upgrade and a refinancing.

The only cloud on MAp's horizon is the uncertainty over the judgement by ACT on declaring the domestic runway. It is unclear whether an adverse ruling would actually lead to a change in pricing, with MAp maintaining they are pricing below the regulatory regime. We estimate domestic runway revenue since 2001 has only increased at 0.7% pa, yet inflation has averaged 2.4%, hardly an indication of excessive pricing.

Since MRE lowered their recommendation on 17 June , MAp has fallen 10% (adjusted for dividend). At $3.23 MAp has a holding period return of 16%, which is well above MRE’s market expectation of 5.5%. Positive news from Rome, the potential for acquisitions and solid results should swamp any concerns from an adverse Sydney declaration decision. As a result MRE have upgraded Their recommendation back to outperform