Pan-Asia Equity Bottom-up, Wickhams Hill

Lloyd Moffatt

I am a fundamental-value investment analyst with a bent for events and soft catalysts.

During my time on both the buy-side and sell-side I focussed on small and mid-cap companies in ASEAN, Australia and HK/China.

Although a generalist, my background as an engineer lends itself toward deep-dive research in more practical sectors like consumer and industrials.

Previous recommendations include:

Concepcion Industrial		(CIC PM)	BUY	03/12/2015		+100.1%
OSIM International		(OSIM SP)	BUY	11/12/2015		+36.9%
Bellamy's Australia Ltd	(BAL AU)	SELL	08/06/2016		+60%
Pryce Corp				(PPC PM)	BUY	14/07/2016		+105%
Rukun Raharja			(RAJA IJ)	BUY	16/02/2017		+61%
Asian Pay Television Trust (APTT SP)	BUY	30/12/2016		+67%

Pan-Asia Equity Bottom-up

MacroAsia - Some Green Shoots Amongst the Complex 2Q18 Results

MacroAsia (MAC PM) - Company Visit Highlights Short-Term Headwinds but Core Business on Solid Ground

Research-Intensive Fundamental Value Advisor

Wickhams Hill

Wickhams Hill Capital is a research-intensive fundamental value advisor, on long and occasionally short investment opportunities concentrated in small and mid-cap public companies.

Equity Bottom-Up

<a href="https://www.smartkarma.com/entities/23070" target="_blank" data-smartkarma-citation="entities:23070:1">MacroAsia Corp (MAC PM)</a> is a diversified aviation services business in the Philippines with 20 years of experience in the sector. The company is majority owned by the Lucio Tan group and its largest shareholder, <a href="https://www.smartkarma.com/entities/23101" target="_blank" data-smartkarma-citation="entities:23101:1">PAL Holdings Inc (PAL PM)</a> or (Philippine Airlines), is another Lucio Tan company. It provides the full suite of aviation services Airline Ground Handling (Macro Asia Airport Services Corp.), Inflight Catering (MacroAsia Catering Services, Inc.) and, Aircraft Line &amp; Base Maintenance/Engineering services (Lufthansa Technik Philippines). The company has recently diversified its catering business further into Non-Airline meals as well through a new facility in Sucat.In addition to these services, MAC operates in the water treatment and supply sector as well through water concessions in Solano, Boracya, Naic, Maragondon, Ilo Ilo and, Tagum City. The company also has some dormant mining assets, a legacy business from the 1970’s which it intends to divest in times to come.<ul><li>The Philippine leader in In-Flight catering sector: MacroAsia commands a 65% market share in the In-Flight catering sector. The acquisition of Sky Kitchen will further boost capacity at Manila’s Ninoy Aquino International Airport (NAIA) and Mactan–Cebu International Airport (MCIA) driven by a need to improve service quality across the sector. Additional expansion into non-tier 1 cities will compete out smaller players, improving service quality at these airports as well as MacroAsia’s bottom line.</li><li>Expansion post-MIASCOR and SkyLogistics Acquisition will establish MASCORP as the Dominant Player in the Ground Handling sector: Following <a href="http://newsinfo.inquirer.net/972556/miaa-terminates-miascors-contract" target="_blank">MIASCOR’s shutdown by President Duterte</a> after a string of high profile theft cases at NAIA, MIASCOR’s contract was not renewed by the MIAA. The shutdown of MIASCOR will allow MASCORP to expand its services by an additional 8-10% of market share. The ramp-up to absorb MIASCOR’s business, for which half of their existing clients have already been on boarded, has brought additional costs that impacted profitability in 1Q18 because revenues from only 3 of the 7 new clients has been recognised during the quarter. The acquisition of Lucio Tan owned Sky Logistics will add another 17% of market share to MASCORP bringing the total market share to c.45% at NAIA. This will allow MASCORP to expand capabilities at NAIA due to higher load in line maintenance capabilities, establishing it as the dominant player at NAIA.</li><li>German Engineering operating a Philippine cost structure creating a competitive moat: Lufthansa Technik Philippines (LTP) is a 51:49 JV with Lufthansa Technik and MacroAsia. The sector is currently undergoing significant expansion to accommodate not only more but also larger aircraft. LTP currently has a 50% market share in Line Maintenance at NAIA and 65% market share in Base Maintenance at NAIA. LTP’s main competitors are $SIA Engineering, $ HAECO Group and $Garuda Maintenance Facility. LTP’s focus on labour-intensive maintenance, as opposed to its competitors such as SIE, allows it to leverage the Philippine cost structure to its fullest via the availability of cheap labour. Additionally, LTP is the only provider in the region with facilities able to accommodate A380’s for base maintenance services. Further plans to move from 1.5 to 3 shifts day will drive higher utilisation rates, potentially driving 37% growth in associate income during FY19 to PHP 1.44bn and 50% in FY20 to PHP 2.16bn.</li><li>Strong growth underpins valuation: Across these three business units, we forecast 20% revenue growth in FY18 and 13% through 2020. Despite this impressive growth in profit, the trailing P/E of 34x clearly prices some of this in. We estimate the company will trade on 15x FY20 P/E - not obviously cheap given there’s meaningful execution risk to this forecast. That said, MacroAsia is now a US$640mn market cap company with zero sell-side coverage or forward estimates and minimal foreign ownership.</li><li>Key risks include structural limitations: Traffic at NAIA has barely grown, c.6% since 2014 while the rest of the region averages double-digit growth over the same period. The ‘Build, Build, Build’ campaign has targeted Mactan Cebu International Airport (MCIA) first. The new terminal at MCIA will open in June 2018 and is expected to significantly alleviate congestion. The terminal will also add 6 new airlines, creating an opportunity for MASCORP to expand services at MCIA as well. However, expansion at NAIA is key to driving MacroAsia’s ground handling and catering sectors as it comprises the bulk of MacroAsia’s operations in those sectors. Currently, there are 2 competing bids, details of the bidder can be found <a href="https://news.mb.com.ph/2018/03/08/naia-expansion-main-solution-to-decongest-airport-poe/" target="_blank">here</a>. The plan is to expand NAIA to serve 1000 aircraft movements per day, up from the current 730.</li></ul>

MacroAsia Corp (MAC PM) is a diversified aviation services business in the Philippines with 20 years of experience in the sector. The company is majority owned by the Lucio Tan group and its largest shareholder, PAL Holdings Inc (PAL PM) or (Philippine Airlines), is another Lucio Tan company. It provides the full suite of aviation services Airline Ground Handling (Macro Asia Airport Services Corp.), Inflight Catering (MacroAsia Catering Services, Inc.) and, Aircraft Line &amp; Base Maintenance/Engineering services (Lufthansa Technik Philippines). The company has recently diversified its catering business further into Non-Airline meals as well through a new facility in Sucat.In addition to these services, MAC operates in the water treatment and supply sector as well through water concessions in Solano, Boracya, Naic, Maragondon, Ilo Ilo and, Tagum City. The company also has some dormant mining assets, a legacy business from the 1970’s which it intends to divest in times to come.The Philippine leader in In-Flight catering sector: MacroAsia commands a 65% market share in the In-Flight catering sector. The acquisition of Sky Kitchen will further boost capacity at Manila’s Ninoy Aquino International Airport (NAIA) and Mactan–Cebu International Airport (MCIA) driven by a need to improve service quality across the sector. Additional expansion into non-tier 1 cities will compete out smaller players, improving service quality at these airports as well as MacroAsia’s bottom line.Expansion post-MIASCOR and SkyLogistics Acquisition will establish MASCORP as the Dominant Player in the Ground Handling sector: Following MIASCOR’s shutdown by President Duterte after a string of high profile theft cases at NAIA, MIASCOR’s contract was not renewed by the MIAA. The shutdown of MIASCOR will allow MASCORP to expand its services by an additional 8-10% of market share. The ramp-up to absorb MIASCOR’s business, for which half of their existing clients have already been on boarded, has brought additional costs that impacted profitability in 1Q18 because revenues from only 3 of the 7 new clients has been recognised during the quarter. The acquisition of Lucio Tan owned Sky Logistics will add another 17% of market share to MASCORP bringing the total market share to c.45% at NAIA. This will allow MASCORP to expand capabilities at NAIA due to higher load in line maintenance capabilities, establishing it as the dominant player at NAIA.German Engineering operating a Philippine cost structure creating a competitive moat: Lufthansa Technik Philippines (LTP) is a 51:49 JV with Lufthansa Technik and MacroAsia. The sector is currently undergoing significant expansion to accommodate not only more but also larger aircraft. LTP currently has a 50% market share in Line Maintenance at NAIA and 65% market share in Base Maintenance at NAIA. LTP’s main competitors are $SIA Engineering, $ HAECO Group and $Garuda Maintenance Facility. LTP’s focus on labour-intensive maintenance, as opposed to its competitors such as SIE, allows it to leverage the Philippine cost structure to its fullest via the availability of cheap labour. Additionally, LTP is the only provider in the region with facilities able to accommodate A380’s for base maintenance services. Further plans to move from 1.5 to 3 shifts day will drive higher utilisation rates, potentially driving 37% growth in associate income during FY19 to PHP 1.44bn and 50% in FY20 to PHP 2.16bn.Strong growth underpins valuation: Across these three business units, we forecast 20% revenue growth in FY18 and 13% through 2020. Despite this impressive growth in profit, the trailing P/E of 34x clearly prices some of this in. We estimate the company will trade on 15x FY20 P/E - not obviously cheap given there’s meaningful execution risk to this forecast. That said, MacroAsia is now a US$640mn market cap company with zero sell-side coverage or forward estimates and minimal foreign ownership.Key risks include structural limitations: Traffic at NAIA has barely grown, c.6% since 2014 while the rest of the region averages double-digit growth over the same period. The ‘Build, Build, Build’ campaign has targeted Mactan Cebu International Airport (MCIA) first. The new terminal at MCIA will open in June 2018 and is expected to significantly alleviate congestion. The terminal will also add 6 new airlines, creating an opportunity for MASCORP to expand services at MCIA as well. However, expansion at NAIA is key to driving MacroAsia’s ground handling and catering sectors as it comprises the bulk of MacroAsia’s operations in those sectors. Currently, there are 2 competing bids, details of the bidder can be found here. The plan is to expand NAIA to serve 1000 aircraft movements per day, up from the current 730.

DEEP DIVE: Still Opportunity After the Re-Rating