20 June 2019
Malaysia Airports Holdings Bhd
(June 19, RM8.51)
Maintain buy with an unchanged target price (TP) of RM8.80:
The Malaysian Aviation Commission (Mavcom) released its second consultation paper for the framework of aeronautical charges. With regard to the regulatory-based asset framework, Malaysia Airports Holdings Bhd (MAHB) submitted a nominal pre-tax weighted average cost of capital (WACC) range of 12.7% to 14%, Mavcom proposed a lower nominal pre-tax WACC of 10.9%. We believe the function of WACC here is a comparative benchmark for the setting of the rates and returns.
Three options were also laid out by MAHB for the passenger service charges (PSCs) for all airports: i) equalising Asean and non-Asean PSCs while keeping the domestic airports for PSCs unchanged; ii) equalising Asean and non-Asean PSC but raising the domestic PSC from RM11 to RM14 per passenger; and iii) differentiating Asean PSC and non-Asean PSC (for the Kuala Lumpur International Airport [KLIA], klia2, Penang, Kota Kinabalu, Langkawi and Subang) combined with raising the domestic PSC for all airports from RM11 to RM14 per passenger. The proposed revisions in PSC charges are based on the latest announcement on the operating agreement (OA) that laid out the terms for the extension which includes the introduction of four new OAs for KLIA, designated airports in Peninsular Malaysia, and Sabah and Sarawak airports.
In addition to the revision of the PSCs according to groupings, Mavcom and MAHB have both proposed a PSC for all transit and transfer passengers for up to 24 hours. MAHB has proposed a PSC of RM3 and RM17 for domestic and international transfer passengers respectively for all three options laid out. Meanwhile, Mavcom has suggested a slightly higher rate of RM5 and RM20 for domestic and international transfer passengers.
If we were to apply the PSC rates proposed by MAHB, a total of RM2.2 million of additional revenue (excluding marginal cost support and net change of normal domestic and international PSC rates) is expected to be collected from the transit passengers. Although RM2.2 million only makes up less than 5% of MAHB’s PSC revenue in financial year 2018, we opine that this additional source of PSC revenue could buffer any potential downside risks from a lower-than-expected return from the regulated asset base (RAB) framework.
We make no changes to our earnings estimates as the matters highlighted in the consultation paper would be finalised in an official announcement in October 2019.
We opine that the latest changes in the consultation paper indicate the certainty of the RAB framework to be implemented according to schedule by January 2020. Meanwhile, in the short term, we believe that the impending departure levy would be tempered by accommodative visa policies for tourists in China and India. Other growth factors would include direct connectivity seen from international airlines’ flight straight to locations such as Langkawi.
As such, we strongly believe that MAHB passenger numbers can surpass the 100 million mark in 2019, while maintaining a relatively conservative growth rate of 3.5% which translates to 102.5 million passengers. All factors considered, we are maintaining our “buy” call on MAHB with an unchanged TP of RM8.80 per share based on discounted cash flow valuation. Risks to our call include adverse revision towards the user fee paid to the government and lower-than-expected returns from under the new RAB framework. — MIDF Research, June 19