Pain before gain for SMC-led Naia group

MANILA, Philippines  —The consortium led by San Miguel Corp. (SMC) may have a hard time turning in profits during the first five to seven years of upgrading, operating and maintaining Ninoy Aquino International Airport (Naia) due to a large revenue share commitment to the government, according to research and market insights firm CreditSights.

The unit of credit watcher Fitch Solutions, in a study on Monday, said the 82.16-percent revenue share by the SMC SAP & Co. consortium was expected to result in “modestly negative annual Ebitda (earnings before interest, taxes, depreciation and amortization) generation from the airport even post the expansion works.”

A negative Ebitda, a measure of profitability, means that an entity’s operating expenses surpassed the revenues, resulting in negative operating profit.

The credit research firm saw the potential financial struggle as the group is expected to shell out a sizable amount to fund capital expenditures for airport upgrades while remitting a significant portion of its earnings to the government under the operations and maintenance deal.

Negative operating profit

The Department of Transportation (DOTr) estimated that at least P122.3 billion will be spent for the public-private partnership project.

The analytics firm noted that the billionaire Ramon Ang-led group’s revenue share bid was already markedly higher compared to what Naia was paying to the government at present.

Last year, only about 14 percent of the P10.19-billion airport revenues were remitted to the government.

In addition, the SMC consortium put forward a rather aggressive bid than competitors who submitted less than half of its proposal.

“While this could suggest SMC’s strong desire towards seizing a dominant market share of the Metro Manila air traffic, it would still have been sensible to bid for a project that makes better economic sense and that rakes in a positive pro-forma Ebitda,” CreditSights explained.

SMC previously said their proposal sought to provide the government with the “most advantageous revenue-sharing agreement.”

P36B yearly over 25 years

Timothy John Batan, transportation undersecretary for planning and project development, also assured the public that financial evaluations were conducted to determine if the concessionaire can sustain operations while delivering their commitments for the project.

The DOTr projected the project to generate P900 billion or P36 billion annually over the course of a 25-year concession period. This includes the P30-billion upfront payment, the P2 billion annuity payment and revenue share.

CreditSights said the capital intensive project would have a “manageable” impact on the conglomerate’s credit profile as the spending would be split among its partners.

Nevertheless, it projects that SMC’s net leverage would worsen to 7.8x to 8.0x from 7.6x as of its latest report.

Net leverage is a ratio of a company’s debt to its earnings, showing its financial capability to pay off its obligations. A higher figure means greater financial risk.

In relation to this, the research firm projects SMC’s capital outlays to hover around or beyond P200 billion over the next two to three years due to its ongoing airport and other infrastructure projects.

READ: SMC: ‘New Manila’ airport project advancing

As San Miguel is in the process of taking over Naia, it is also developing the P735-billion New Manila International Airport in Bulacan.

“We expect NAIA to complement SMC’s greenfield international Bulacan Airport that is slated to be completed in 2027, thereby driving revenue and cost synergies,” CreditSights said.

Concession deal signing

“[We] view the addition of Naia as complimentary that could open more connecting routes, improve operational synergies and capture a larger air passenger traffic share at Manila for SMC,” it added.

The DOTr previously said that airport passenger volume in the country was expected to reach 100 million by 2050.

Last week, the DOTr named the San Miguel-led consortium as the winning bidder for the Naia upgrade project after submitting the highest bid.

The group, apart from SMC, includes local companies RLW Aviation Development Inc. and RMM Asian Logistics Inc. and Korean airport operator Incheon International Airport Corp.

READ: SMC wins bid for P170.6-billion Naia rehabilitation project

The signing of concession agreement between the government and the group is scheduled within 30 days. This will then be followed by financial closing of three to six months before the group officially implement the upgrades.

The SMC-led group was granted a concession period of 15 years, which can be extended by another 10 years.

The consortium is tasked to rehabilitate passenger terminals and airside facilities such as runway, aircraft parking area and airfield lighting; and provide facilities that will enable intermodal transfers at the terminal, among others.

In a statement on Monday, Manila International Airport Consortium—one of the losing bidders—expressed its support to the result of the competitive bidding process.

“We will continue to support nation-building efforts and rally behind the government in all its programs to promote a stronger and more progressive Philippines,” it added.