Changi Airport is one of the world’s best airports and one of the most efficient. This is borne out by Changi Airport Group’s (CAG) FY2024 results for the 12 months to end-March 31, where revenue was up 45% and expenses up 20%, giving rise to positive jaws, and operating profit was up many times to $493.5 million.
CAG is not listed and is owned by the Ministry of Finance. Although there are many listed airports, few can rival Changi Airport in service, comfort and experience.
Airports, as an investment theme, are unique, as they have structural economic competitive advantages. Generally, airports exist as a monopoly infrastructure within their geographical areas of operation. This usually entails a licence from the state or federal entity, with considerations such as scarcity of land, environmental issues and flight pathway constraints. As such, most airport operators operate solely within a geographical area, with their moats made stronger through state ownership and long-term concessions. Here, too, CAG is different as it competes with other airports in Asean and the broader Asia Pacific region, and has done so since it started commercial operations in 1981.
Recent news of the offer to privatise Bursa Malaysia-listed Malaysia Airports Holdings ought to add to investor interest, particularly for the privatisation and buyouts of airports.
There could be a multitude of reasons behind taking airports private, such as improving the operational efficiency of the business, more state-controlled ownership, and that it is potentially undervalued. To the public investor, shareholder return could be lucrative for privatisation offers that are well above the airport’s current trading price. The more undervalued a business is, the more likely investors are able to earn better returns on their investment. The challenge, however, is in assessing whether an airport is undervalued, and undervalued enough to be considered for privatisation.
But, does an airport have to be undervalued to be considered for privatisation, given that one significant factor is likely to be the potential value enhancement by focusing on the operational efficiency of airports? To the investor, this implies that airports that are inefficient, such as having low profitability ratios, could potentially be privatisation targets. The monopoly factor of airports adds to the potential value enhancement aspect to offerors, and investors could consider relatively cheap airports, given most airports trade at high price multiple ratios.
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The Edge Singapore has taken a deep dive into 20 airport and airport-themed business operators globally. Table 1 shows the brief business description of these selected airports.
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Table 2 shows the profitability ratios of these airports, comprising return on assets (ROA) and return on equity (ROE); along with their premium or discount for forward trading multiples. A negative value indicates a discount and that it is cheaper relative to peers, while a positive value indicates that it is trading at a premium to comparable peers. These price multiples include the price-to-earnings (P/E), price-to-book (P/B), and enterprise value to earnings before interest, taxes, depreciation and amortisation (EV/Ebitda) ratios. The comparison is against the global peer mean, of which the forward P/E, P/B and EV/Ebitda is 17.3 times, 2.4 times, and 10.6 times respectively.
Table 3 shows the overall valuation of each of these companies, which is illustrated in a scoring table. This scoring table is purely quantitative and considers the historical performance, profitability, yields and relative valuation, financial safety, sentiment, and a price-to-value analysis. The price-to-value analysis compares the price growth to the weighted value growth over multiple periods. This weighted value includes revenue, net income and cash flows in ascending order.
Our data shows that the most undervalued three airports are Japan Airport Terminal Co; AENA SME (Aeropuertos Españoles y Navegación Aérea), a Spanish airport; and Aéroports de Paris. All three are in developed markets. Investors who wish to gain exposure to undervalued airport-themed companies may consider examining these stocks further via qualitative analysis.
Disclaimer: This is a personal portfolio for information purposes only and does not constitute a recommendation or solicitation or expression of views to influence readers to buy/sell stocks, including the particular stocks mentioned herein. It does not take into account an individual investor’s particular financial situation, investment objectives, investment horizon, risk profile and/ or risk preference. Our shareholders, directors and employees may have positions in or may be materially interested in any of the stocks. We may also have or have had dealings with or may provide or have provided content services to the companies mentioned in the reports.
