Flughafen Wien FLU AV
September 26, 2016 - 4:11pm EST by
eigenvalue
2016 2017
Price: 22.00 EPS 1.30 1.40
Shares Out. (in M): 84 P/E 17 15.7
Market Cap (in $M): 1,848 P/FCF 10.5 10
Net Debt (in $M): 419 EBIT 170 180
TEV ($): 2,267 TEV/EBIT 13.3 12.6

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Description

First of all, this is an Austrian company, that trades on the Vienna stock exchange in Euros, and all the figures are in euros.  There was no country called Austria in the menu and hence I chose Germany as the closest one.
 
Summary: I recommend a purchase of Flughafen Wien.  It is a European infrastructure asset trading at a 9.8% fully taxed free cash flow yield to the equity, with very low leverage.  It is not a concession, the company actually owns the asset.  In my opinion, the stock should trade around a 5-6% free cash flow yield in a normalized interest rate environment and at around 4% in today's interest rate environment.
 
Description
 
Flughafen Wien is a company that owns and operates Vienna airport.  It is NOT a concession.  It also owns 48.44% and controls a public company that has a 65 year concession to operate the airport in Malta, which is publicly traded in Malta.  There is also a 66% stake in a Slovakian airport, but it is a tiny, albeit profitable business, and will be ignored in the analysis.
 
Regulatory regime - dual till, not based on RAB.  Tariffs are adjusted for passenger growth and inflation.  In other words profits made from selling water/food don't subsidize airport operations.
 
Managerial incentives
 
Two thirds of management compensation for 2014, paid in 2015 were based on performance.
 
Financials:
 
I expect Vienna airport, excluding the business in Malta, to generate E 290MM in EBITDA in 2017, and have approximately E 50MM per annum in maintenance capital expenditures per annum, again excluding the Malta business.  While historically, there has been passenger growth in Vienna of a bit more than 1% per annum, for the purposes of this analysis, I will assume zero passenger growth post 2016.
 
It is important to note that commercial profits per passenger are extremely low and the company has a plan to boost them signficantly.  I am not assuming that the company will be sucessful in this regard, but if they manage to do it, that will significantly boost profitability, cash flows and intrinsic value.
 
The company estimates that net debt is going to be under E 400MM on 12/31/2016, which will be less than 1.3x EBITDA, exceptionally low for what is essentially a real estate company.
 
Corporate tax rate in Austria is 25%.
 
So, I estimate that in 2017, the company, excluding Malta airport, will generate E 172.5mm in fully taxed free cash flow to the equity.
 
E 290MM EBITDA - E50MM in cap ex - E10MM in interest - E 57.5MM in taxes.  
 
Valuation:
 
a) Vienna airport - 172.5MM free cash flow * 25 = E 4.3bn.  
b) Value of Malta stake - I expect that our share of net income will = E 11MM, and arbitrarily assign a 25x P/E multiple.  There has been mid single digit passenger growth in Malta over the past several years.  Thus, I value the stake at E 265MM.  (25*11MM.)  This implies that Malta airport as a whole will earn E 23MM in net income in 2017.  The market value of the stake is around E 285MM, but the stock is exceptionally illiquid.  The concession will expire in July of 2067.
c) New E 500MM project at the Vienna airport - company claims that it will allow it to take advantage of future passenger growth as well as boost commercial profits per passenger.  Company's history is not encouraging in this regard, but they claim to have learned their lesson.  Given their projection of a 9% after tax return on capital invested on an un-leveraged basis, hard to imagine, given today's levels of interest rates that this will be a value destroying project.  If the company delivers the way it plans to, it could create E 1bn of value assuming a 3% cap rate.  At a 5% cap rate, value created would = E 400MM.  I am assuming that this project will be NPV neutral.  (Company has already spent E 150MM by 12/31/2015 on this project.)  So value = E 150MM at cost on 12/31/2015.
d) Passenger growth and per passenger commercial profits evolution.  I am assuming zero for the former and zero in real, post inflation, terms for the latter.  Clearly this is a wild card that could go either way. Currently, commercial revenues (NOT profits) were = E 5.62 per passenger in 2015, which is a fraction of other European airports.  For whatever it's worth, the company is forecasting 28MM in passengers in 2020 vs 22.8MM in 2015 and 23MM (forecasted) for 2016.
 
Total value to the equity = E 4.715bn.  There are 84MM shares on a post-split basis, and hence value = E 56 per share.  If the company can hit its target of 28MM passengers in 2020, value would probably be 30%+ higher or closer to E 73 per share.  If the company is able to raise its industry low commercial revenues and profits per passenger, the stock would be worth considerably more than estimated.  For instance, if the company would raise its commercial profits (on a pre-tax basis) from E 3.02 per passenger to E 4.02 per passenger, that would increase value by E 5 per share.
So I think the stock is worth at least E 56 per share versus the current price of E 22, and possibly as much as 85 E per share if the company is correct in its traffic forecasts and is able to get the returns that it expects from its E 500MM expansion project.
 
Major risks: 
Terrorism or major global pandemics (yellow fever, Zika, Ebola, SARS, etc...) impacting tourism.
Massive immigration from Africa, the Islamic world, and other places making Vienna an unpleasant place to visit and hence killing tourism.
I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise do not hold a material investment in the issuer's securities.

Catalyst

None over the next 5 years.  By 12/31/2021, at the current rate of debt paydown, the company should be both debt free and have completely funded the E 500MM expansionary project.  At that time, I expect dividends to be signficantly increased.  If the stock price is unchanged and the company pays out 90% of fcf in the form of dividends, then dividend yield could be in excess of 10%.

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    Description

    First of all, this is an Austrian company, that trades on the Vienna stock exchange in Euros, and all the figures are in euros.  There was no country called Austria in the menu and hence I chose Germany as the closest one.
     
    Summary: I recommend a purchase of Flughafen Wien.  It is a European infrastructure asset trading at a 9.8% fully taxed free cash flow yield to the equity, with very low leverage.  It is not a concession, the company actually owns the asset.  In my opinion, the stock should trade around a 5-6% free cash flow yield in a normalized interest rate environment and at around 4% in today's interest rate environment.
     
    Description
     
    Flughafen Wien is a company that owns and operates Vienna airport.  It is NOT a concession.  It also owns 48.44% and controls a public company that has a 65 year concession to operate the airport in Malta, which is publicly traded in Malta.  There is also a 66% stake in a Slovakian airport, but it is a tiny, albeit profitable business, and will be ignored in the analysis.
     
    Regulatory regime - dual till, not based on RAB.  Tariffs are adjusted for passenger growth and inflation.  In other words profits made from selling water/food don't subsidize airport operations.
     
    Managerial incentives
     
    Two thirds of management compensation for 2014, paid in 2015 were based on performance.
     
    Financials:
     
    I expect Vienna airport, excluding the business in Malta, to generate E 290MM in EBITDA in 2017, and have approximately E 50MM per annum in maintenance capital expenditures per annum, again excluding the Malta business.  While historically, there has been passenger growth in Vienna of a bit more than 1% per annum, for the purposes of this analysis, I will assume zero passenger growth post 2016.
     
    It is important to note that commercial profits per passenger are extremely low and the company has a plan to boost them signficantly.  I am not assuming that the company will be sucessful in this regard, but if they manage to do it, that will significantly boost profitability, cash flows and intrinsic value.
     
    The company estimates that net debt is going to be under E 400MM on 12/31/2016, which will be less than 1.3x EBITDA, exceptionally low for what is essentially a real estate company.
     
    Corporate tax rate in Austria is 25%.
     
    So, I estimate that in 2017, the company, excluding Malta airport, will generate E 172.5mm in fully taxed free cash flow to the equity.
     
    E 290MM EBITDA - E50MM in cap ex - E10MM in interest - E 57.5MM in taxes.  
     
    Valuation:
     
    a) Vienna airport - 172.5MM free cash flow * 25 = E 4.3bn.  
    b) Value of Malta stake - I expect that our share of net income will = E 11MM, and arbitrarily assign a 25x P/E multiple.  There has been mid single digit passenger growth in Malta over the past several years.  Thus, I value the stake at E 265MM.  (25*11MM.)  This implies that Malta airport as a whole will earn E 23MM in net income in 2017.  The market value of the stake is around E 285MM, but the stock is exceptionally illiquid.  The concession will expire in July of 2067.
    c) New E 500MM project at the Vienna airport - company claims that it will allow it to take advantage of future passenger growth as well as boost commercial profits per passenger.  Company's history is not encouraging in this regard, but they claim to have learned their lesson.  Given their projection of a 9% after tax return on capital invested on an un-leveraged basis, hard to imagine, given today's levels of interest rates that this will be a value destroying project.  If the company delivers the way it plans to, it could create E 1bn of value assuming a 3% cap rate.  At a 5% cap rate, value created would = E 400MM.  I am assuming that this project will be NPV neutral.  (Company has already spent E 150MM by 12/31/2015 on this project.)  So value = E 150MM at cost on 12/31/2015.
    d) Passenger growth and per passenger commercial profits evolution.  I am assuming zero for the former and zero in real, post inflation, terms for the latter.  Clearly this is a wild card that could go either way. Currently, commercial revenues (NOT profits) were = E 5.62 per passenger in 2015, which is a fraction of other European airports.  For whatever it's worth, the company is forecasting 28MM in passengers in 2020 vs 22.8MM in 2015 and 23MM (forecasted) for 2016.
     
    Total value to the equity = E 4.715bn.  There are 84MM shares on a post-split basis, and hence value = E 56 per share.  If the company can hit its target of 28MM passengers in 2020, value would probably be 30%+ higher or closer to E 73 per share.  If the company is able to raise its industry low commercial revenues and profits per passenger, the stock would be worth considerably more than estimated.  For instance, if the company would raise its commercial profits (on a pre-tax basis) from E 3.02 per passenger to E 4.02 per passenger, that would increase value by E 5 per share.
    So I think the stock is worth at least E 56 per share versus the current price of E 22, and possibly as much as 85 E per share if the company is correct in its traffic forecasts and is able to get the returns that it expects from its E 500MM expansion project.
     
    Major risks: 
    Terrorism or major global pandemics (yellow fever, Zika, Ebola, SARS, etc...) impacting tourism.
    Massive immigration from Africa, the Islamic world, and other places making Vienna an unpleasant place to visit and hence killing tourism.
    I do not hold a position with the issuer such as employment, directorship, or consultancy.
    I and/or others I advise do not hold a material investment in the issuer's securities.

    Catalyst

    None over the next 5 years.  By 12/31/2021, at the current rate of debt paydown, the company should be both debt free and have completely funded the E 500MM expansionary project.  At that time, I expect dividends to be signficantly increased.  If the stock price is unchanged and the company pays out 90% of fcf in the form of dividends, then dividend yield could be in excess of 10%.

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