N/A. FY17 net income up 146% to Php1.1Bil on strength of core businesses. MacroAsia Corporation TUE 03 APR 2018

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1 MacroAsia Corporation FY17 net income up 146% to Php1.1Bil on strength of core businesses Benefiting from strength of core businesses. MAC s FY17 net income grew by 146% to Php1.1Bil. This was driven by the strong growth of its core businesses (Catering, ground handling) and the significant increase in its share of net income from Lufthansa Technik Philippines (LTP). FY17 revenues from MacroAsia Catering Services (MACS) or in-flight and other catering services grew 7% to Php1.54Bil in 2017, while revenues from MacroAsia Service Corporation (MASCORP) or ground handling and aviation grew 52% to Php1.03Bil. Share in net income of associates, which represents profits from MAC s 49% stake in LTP, grew by 82% to Php968Mil from just Php532Mil in FY17 EBITDA, which includes earnings from LTP doubled to Php1.34Bil from Php668Mil in Catering: Facility issues already resolved, new facility to come online in 2H18. MACS, which is 67% owned by MAC, 33% by SATS of Singapore, witnessed revenues grow to Php1.54Bil, up 7% in Core inflight meal businesses grew by 8% in However, revenues from non-airline meal businesses slowed as MACS was forced to turn down institutional clients due to facility issues in its NAIA kitchen. Strong growth in ground handling, more to come. As discussed earlier, MASCORP, which handles MAC s gateway services and ground handling experienced a 52% surge in revenues in 2017 to Php1.0Bil. This was driven primarily by the increase in the flights handled and the number of airports served. From only 7 stations in 2016, the number of stations handled by MASCORP increased to 27 in LTP: Benefiting from higher volumes and margins: LTP s revenues grew to Php12.8Bil in 2017 from Php9.6Bil in 2016 due to the continued growth in line maintenance and base maintenance businesses. Line maintenance, which refers to maintenance, repairs, and overhaul (MRO) conducted in airports, grew by 4% in 2017 and now represents 46% of core revenues. Meanwhile, base maintenance revenues grew by 10% in 2017, representing 54% of core revenues. Net income from LTP grew by a much faster pace of 81% to Php968Mil driven by higher margins. Targeting to grow profits by 20% in 2018, successful M&A crucial in supporting share price. For 2018, MAC is targeting to grow profits by around 20% as the outlook of all its businesses remain positive. Assuming that MAC s profits grow by 20% in 2018, in line with its growth guidance, it would be trading at 27.05X 2018 P/E based on its current price of Php This is a premium compared to the average P/E multiple of its regional peers. However, we believe that the market is already pricing in successful acquisitions that will significantly boost profits. Assuming that the said acquisitions do not materialize, MAC s share price will most likely respond negatively. FORECAST SUMMARY (in Php Mil) Revenues 1,610 1,723 1,921 2,335 % change y/y 0.6% 7.0% 11.5% 21.6% Operating income (247) % change y/y n/a n/a 249.5% 48.8% Operating margin (%) -15.3% 5.5% 17.3% 21.2% Net income (161) % change y/y 0.1% n/a 179.5% 29.0% Net margin (%) n/a n/a 17.8% 18.8% EPS (Php) (0.13) % change y/y 0.1% (176) RELATIVE VALUE P/E (X) P/BV (X) ROE (%) Dividend yield (%) source: M AC TICKER: FAIR VALUE: 1M 3M YTD MAC PSEi Market Cap Outstanding Shares 32,642.31Mil 1,227.15Mil 52 Wk Range Mo Ave Daily T/O N/A MAC N/A CURRENT PRICE: UPSIDE: SHARE PRICE MOVEMENT ABSOLUTE PERFORMANCE MARKET DATA ADRIAN ALEXANDER YU RESEARCH ANALYST adrian.yu@colfinancial.com N/A 80 3-Jan-18 3-Feb-18 3-Mar-18 3-Apr-18 MAC PSEi 91.12Mil Disclaimer: All content provided in COL Reports are meant to be read in the COL Financial website. Accuracy and completeness of content cannot be guaranteed if reports are viewed outside of the COL Financial website as these may be subject to tampering or unauthorized alterations.

2 Benefiting from strength of core businesses MAC s FY17 net income grew by 146% to Php1.1Bil. This was driven by the strong growth of its core businesses (Catering, ground handling) and the significant increase in its share of net income from Lufthansa Technik Philippines (LTP). FY17 revenues from MacroAsia Catering Services (MACS) or in-flight and other catering services grew 7% to Php1.54Bil in 2017, while revenues from MacroAsia Service Corporation (MASCORP) or ground handling and aviation grew 52% to Php1.03Bil. Share in net income of associates, which represents profits from MAC s 49% stake in LTP, grew by 82% to Php968Mil from just Php532Mil in FY17 EBITDA, which includes earnings from LTP doubled to Php1.34Bil from Php668Mil in However, MAC s FY17 net income of Php1.1Bil is below the annualized 9M17 net income of around Php1.2Bil. MAC attributed the weaker 4Q17 numbers to the seasonal nature of its airline service business brought about by the lower volume of passengers in the fourth quarter and the scheduled two weeks of no heavy maintenance work for LTP. Exhibit 1: Results Summary in PhpMil 4Q16 4Q17 % % FY16 FY17 Change Change Revenues % 2,335 2, % In flight and other catering % 1,446 1, % Groundhandling and aviation % 679 1, % Share in income of assoicaties (LTP) % % EBITDA (Equity earnings from LTP Included) , % Net Income % 440 1, % source: MAC Catering: Facility issues already resolved, new facility to come online in 2H18 MACS, which is 67% owned by MAC, 33% by SATS of Singapore, witnessed revenues grow to Php1.54Bil, up 7% in Core inflight meal businesses grew by 8% in However, revenues from non-airline meal businesses slowed as MACS was forced to turn down institutional clients due to facility issues in its NAIA kitchen. Nevertheless, repairs in the NAIA facility are already complete. MACS was also able to get two new airline clients Royal Brunei Airlines and China Eastern. This should help boost revenues from the inflight meal business. Finally, MACS is constructing a new facility located in Sucat, which it expects to be completed by 2H18. MACS plans to use the new facility to serve its nonairline or institutional clients as revenues from the said facility would no longer be subject to the 7% concession privilege fee, helping boost margins. COL Financial Group, Inc. 2

3 Strong growth in ground handling, more to come As discussed earlier, MASCORP, which handles MAC s gateway services and ground handling experienced a 52% surge in revenues in 2017 to Php1.0Bil. This was driven primarily by the increase in the flights handled and the number of airports served. From only 7 stations in 2016, the number of stations handled by MASCORP increased to 27 in Despite its growth in 2017, growth outlook remains positive. Presently, MASCORP has only captured 17% of the Manila market, indicating a potentially large addressable market moving forward. Moreover, the winding down of Miascor s ground handling operations has resulted in some clients switching to MAC for groundhandling services. In fact, beginning April 2018, MASCORP will serve five former Miascor accounts. The company also said that the number of stations handled by MASCORP would increased further from 27 in 2017 to 30 in 2018, helping drive earnings growth. LTP: Benefiting from higher volumes and margins : LTP s revenues grew to Php12.8Bil in 2017 from Php9.6Bil in 2016 due to the continued growth in line maintenance and base maintenance businesses. Line maintenance, which refers to maintenance, repairs, and overhaul (MRO) conducted in airports, grew by 4% in 2017 and now represents 46% of core revenues. Meanwhile, base maintenance revenues grew by 10% in 2017, representing 54% of core revenues. Net income from LTP grew by a much faster pace of 81% to Php968Mil driven by higher margins. There are concerns regarding LTP s growth potential as it is already operating at 87% capacity. However, management disclosed that there is still space to add two more hangars in its NAIA location to service higher volume of planes. Management also expressed confidence that 2018 numbers will remain strong. According to the company, more than 50% of MRO base maintenance slots for 2018 have already been booked. Last February 2018, LTP signed a five-year agreement with Asiana Airlines to take on their base maintenance work for a total of 14 checks on Asiana s A380s from 2018 to Furthermore, PAL also awarded a line maintenance contract to LTP for their new A321neo and A350 planes for the next 12 years. COL Financial Group, Inc. 3

4 Targeting to grow profits by 20% in 2018, successful M&A crucial in supporting share price For 2018, MAC is targeting to grow profits by around 20% as the outlook of all its businesses remain positive. MAC will allocate Php2.6Bil for capex, up from Php950 Mil in However, this excludes investments allocated for potential Merger and Acquisition transactions. The company said that it is still looking at a possible acquisition in the catering business that will allow the number of airline meals to more than double from around 11,000 currently, although it is still not yet final. Assuming that MAC s profits grow by 20% in 2018, in line with its growth guidance, it would be trading at 27.05X 2018 P/E based on its current price of Php This is a premium compared to the average P/E multiple of its regional peers. However, we believe that the market is already pricing in successful acquisitions that will significantly boost profits. Assuming that the said acquisitions do not materialize, MAC s share price will most likely respond negatively. Exhibit 2: Relative Valuation Company 18 E P/E 18E EPS Growth MACROASIA CORPORATION % SATS LTD % SHANGHAI INTERNATIONAL AIRPORT Co % AIRPORTS OF THAILAND PCL % XIAMEN INTERNATIONAL AIR % BEIJING CAPITAL INTL AIRPORT % GUANGZHOU BAIYUN INTERNATIONAL AIRPORT % SHENZHEN AIRPORT COMPANY % SIA ENGINEERING COMPANY % (Median (ex-mac) % source: MAC, Bloomberg COL Financial Group, Inc. 4

5 MacroAsia Corporation (MAC) COMPANY BACKGROUND MacroAsia Corporation (MAC) is a holding company primarily engaged in aviation support businesses. It operates thru two main subsidiaries, namely MacroAsia Catering Services, Inc. (MACS, 67% owned) and MacroAsia Airport Services Corporation (MASCORP, 100% owned). MACS provides in-flight catering services to several airlines, and captures about 60% market share of the foreign airline catering services. Meanwhile, MASCORP provides ground handling services to both local and foreign clients in majority of the airports in the country. In addition to these two subsidiaries, MAC has a 49% equity stake in Lufthansa Technik Philippines, Inc. (LTP) and a 40% stake in Cebu Pacific Catering Services Inc. (CPCS). LTP provides maintenance, repair and overhaul (MRO) services in several airports in the country while CPCS is a full service airline catering company in Mactan Cebu International Airport. REVENUE BREAKDOWN 29% 4% 8% In-flight and other catering Water 59% Ground handlind and aviation Others INCOME STATEMENT (PHPMIL) Revenues 1,047 1,169 1,446 % Growth 12% 24% Gross Profit % Growth 21% 41% Pretax Income Tax Expense Net Income attributable to Equity % Growth 185% 19% EPS % Growth 185% 19% BALANCE SHEET (IN PHPMIL) Cash & Equivalents Trade Receivables Other Current Assets PPE Other Non-Current Assets 1,696 2,152 2,652 Total Assets 3,327 4,039 4,739 Accounts Payable ST Debts Other Current Liabilities LT Debts Other Non-Current Liabilities Total Liabilities Total Equity 2,810 3,297 3,820 Total Liabilities & Equity 3,327 4,039 4,739 BVPS CASHFLOW STATEMENT (IN PHPMIL) Net income Before tax Depreciation & Amortization Other Non-Cash Exp (Gains) (118) (303) (348) Interest Expense (Income) (13) (9) (17) Decrease (Increase) in Working Cap (232) (165) (16) Income taxes paid (38) (41) (37) Operating Cash Flow (153) (53) 254 Capex (147) (103) (180) Other Investments (199) Investing Cash Flow (97) 80 (380) Proceeds (Payment) Debts 59 (25) 125 Payment of Cash Dividends (4) - (132) Financing Cash Flow 55 (25) (7) Change in Cash (195) 2 (133) COL Financial Group, Inc. 5

6 KEY RATIOS GPM (%) 38% 41% 47% NPM (%) 11% 28% 27% Current Ratio (X) Debt to Equity Ratio Days Receivable Days Payable Asset T/O (%) 31% 29% 31% ROAE (%) 4% 10% 10% COL Financial Group, Inc. 6

7 IMPORTANT RATING DEFINITIONS BUY Stocks that have a BUY rating have attractive fundamentals and valuations based on our analysis. We expect the share price to outperform the market in the next six to 12 months. HOLD Stocks that have a HOLD rating have either 1) attractive fundamentals but expensive valuations 2) attractive valuations but near-term earnings outlook might be poor or vulnerable to numerous risks. Given the said factors, the share price of the stock may perform merely in line or underperform in the market in the next six to twelve months. SELL We dislike both the valuations and fundamentals of stocks with a SELL rating. We expect the share price to underperform in the next six to12 months. IMPORTANT DISCLAIMER Securities recommended, offered or sold by COL Financial Group, Inc. are subject to investment risks, including the possible loss of the principal amount invested. Although information has been obtained from and is based upon sources we believe to be reliable, we do not guarantee its accuracy and said information may be incomplete or condensed. All opinions and estimates constitute the judgment of COL s Equity Research Department as of the date of the report and are subject to change without prior notice. This report is for informational purposes only and is not intended as an offer or solicitation for the purchase or sale of a security. COL Financial and/ or its employees not involved in the preparation of this report may have investments in securities of derivatives of the companies mentioned in this report and may trade them in ways different from those discussed in this report. COL RESEARCH TEAM APRIL LYNN TAN, CFA VP & HEAD OF RESEARCH april.tan@colfinancial.com CHARLES WILLIAM ANG, CFA GEORGE CHING RICHARD LAÑEDA, CFA DEPUTY HEAD OF RESEARCH SENIOR RESEARCH MANAGER SENIOR RESEARCH MANAGER charles.ang@colfinancial.com george.ching@colfinancial.com richard.laneda@colfinancial.com FRANCES ROLFA NICOLAS ANDY DELA CRUZ JUSTIN RICHMOND CHENG RESEARCH ANALYST RESEARCH ANALYST RESEARCH ANALYST rolfa.nicolas@colfinancial.com andy.delacruz@colfinancial.com justin.cheng@colfinancial.com JOHN MARTIN LUCIANO RESEARCH ANALYST john.luciano@colfinancial.com ADRIAN ALEXANDER YU RESEARCH ANALYST adrian.yu@colfinancial.com COL FINANCIAL GROUP, INC D EAST TOWER, PHILIPPINE STOCK EXCHANGE CENTRE, EXCHANGE ROAD, ORTIGAS CENTER, PASIG CITY PHILIPPINES 1605 TEL NO FAX NO WEBSITE: COL Financial Group, Inc. 7