MIA is debt free

The interim reporting season commenced on July 20 with the publication of the financial results of Mapfre Middlesea plc followed by two other announcements last week from Plaza Centres plc and Malta International Airport plc. The series of company announcements will continue over the next four weeks since companies having a December financial year-end are obliged to publish their interim financial statements by the end of August.

Malta International Airport published its interim financial statements on July 25 and the following day the company also announced its revised passenger and financial projections for 2018.

It should not have come as a surprise that the airport operator had achieved another record financial performance. The company publishes its traffic statistics on a monthly basis and given the double-digit growth in passenger movements achieved in each of the first six months of 2018, overall revenue improved accordingly.

MIA reported a 16.3 per cent increase in passenger movements during the first six months of 2018 to nearly 3.07 million, arising from a 17 per cent increase in seat capacity as well as a 16.6 per cent increase in aircraft movements. Despite the substantial increase in seat capacity and aircraft movements, the seat load factor remained broadly unchanged at just under 80 per cent.

Interestingly, despite Ryanair remaining the largest airline operating to Malta with a total of 1.15 million passengers during the first six months (translating into a market share of 37.5 per cent), Air Malta accounted for a larger part of the incremental passengers. During a press conference held last week, MIA reported that Air Malta accounted for an additional 170,000 passenger movements while Ryanair added 131,000.

The heightened traffic translated into overall revenue of €40.9 million, representing an increase of 11.5 per cent over the first half of 2017. Earnings before interest, tax, depreciation and amortisation (EBITDA) climbed by 14.6 per cent to €23.9 million and the EBITDA margin improved to 58.6 per cent from 57 per cent in the first half of 2017.

The major surprise in the financial statements was the repayment of all bank borrowings during the first half of 2018. Following the early repayment of an €11 million fixed interest rate loan during 2017 apart from incurring a sizeable one-time penalty, the financial statements as at June 30 2018 revealed that the company had used a large chunk of its idle cash balance to also pay-off all of its bank borrowings amounting to €33 million.

In previous articles, I mentioned that MIA was virtually debt-free when setting off the high amount of cash against the outstanding loans. However, MIA is now in a position where it has no bank borrowings and a cash balance of €8.86 million as at June 30, 2018.

The repayment of all loans also helped boost the profitability of the company during the first half of the year. In fact, net finance costs declined to only €0.18 million compared to €0.52 million in the first six months of 2017 helping pre-tax profits climb by 18.3 per cent to €20.2 million. The net profit during the first six months of just over €13 million also represents a growth of 18.3 per cent over the net profit registered during the previous six months of €11 million.

In addition to the publication of the interim financial statements, MIA also presented its revised traffic and financial forecast for 2018 and an update to its investment programme.

At the start of 2018, MIA had forecast a growth of between seven per cent to nine per cent in passenger numbers to 6.5 million resulting in projected revenues exceeding €87 million, EBITDA of over €52 million and a net profit of over €28 million.

Following the 16.3 per cent increase in passenger movements during the first six months of 2018, the company is now expecting passenger movements to grow by 13 per cent to reach yet another record of 6.77 million

However, following the 16.3 per cent increase in passenger movements during the first six months of 2018, the company is now expecting passenger movements to grow by 13 per cent, to reach yet another record of 6.77 million. This represents an additional 270,000 passenger movements over the initial forecast at the start of the year. The new forecast reflects the confirmed summer schedule of 100 destinations, as well as the confirmation of the upcoming winter schedule, with a number of the summer routes being extended into the winter, as well as increased capacity on a number of other routes. During last week’s presentation, the CEO mentioned that with the current summer schedule, the incremental capacity amounts to 660,000 seats, mainly from Ryanair (+145,000) and Air Malta (+120,000).

The improved passenger forecast also led the company to update its financial projections. MIA now anticipates that its total revenue will surpass €90 million, which would represent growth of 9.3 per cent compared to the previous record revenue of €82.4 million in 2017. Likewise, EBITDA is expected to exceed €53 million (+9.1 per cent over the €48.6 million in 2017) and net profit is projected to amount to over €29 million (+20 per cent over the €24.2 million in 2017).

During the press conference, the company’s CEO, Alan Borg, also gave an update regarding the sizeable investment programme for the future. Earlier this year, MIA obtained the approval from the Planning Authority of the master plan for the further upgrading and redevelopment of the terminal infrastructure and the surrounding area into an ‘airport campus’. In addition to the imminent investment in a new multi-storey car park, with works commencing by the end of the year, the CEO also announced that the company will be undertaking a significant investment in a new apron (covering an area of circa 46,000 sqm) to cater for the growing demand by commercial airlines wishing to start or increase operations to Malta.

The sizeable parcel of land lies between the old terminal building and the current terminal and was granted to the company through a parliamentary resolution passed a few weeks ago.

Mr Borg also noted that in view of the accelerated growth in passenger traffic, the aim is to commence the €40 million terminal extension by the end of 2019. Meanwhile, design works and other studies for the SkyParks II investment is also taking place ahead of seeking approval by the company’s board of directors in the months ahead.

While it may be surprising for shareholders that the company used most of the cash balances to repay all bank borrowing in recent months despite such an ambitious investment programme, MIA’s CEO explained last week that the company aims to fund most of its capital expenditure for core operations from internal cash flow. It is worth highlighting that in 2017, the net cash flow from operations amounted to €42.7 million while a further €16.3 million was generated during the first six months of 2018.

The CEO also explained that other investments such as the SkyParks II development (at an estimated cost of €40 million) will take place by means of debt funding.

The optimum method to fund a company’s investment programme is highly debatable and subjective. While many proponents believe that debt funding is a cheaper alternative than resorting to additional equity, it seems that MIA are generating sufficient cash to fund most of these investments directly, without the need for either any debt or additional capital. While this may imply a static dividend payment in the years ahead in view of more immediate priorities, shareholders must also view this in the context of the expected transformation of the company’s financial model on completion of the master plan.

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