• We attended a briefing by the Malaysian Aviation Commission (Mavcom) yesterday. The

key takeaways are as follows:

1. Capital expenditure (capex) for airport development in Malaysia is revised downwards from RM5.5bil to RM4.0bil during Regulatory Period (RP) 1 (2020–2022) to reflect the revision in project timeline (some projects will be postponed to RP 2 (2023–2025)) and the reduction in the estimated costs.

2. WACC is maintained at 10.88%.

3. The operating agreement (OA) is still under discussions. The user fee assumptions for RP 1 will be based on the current OA (which is RM548.6mil to RM659.2mil). This will be subjected to a possible mid-term review if the OA renegotiation outcome differs materially.

4. The user fees will remain or be revised higher from the current levels.

5. Passenger traffic growth projection (2018–2022 CAGR) is lowered from 5.7% to 4.9%.

6. The landing and parking charges are highly likely to be increased.

7. Network approach (vs. cluster approach adopted in the OA) will be adopted for passenger service charges (PSC). The airports are divided into five tiers (Exhibit 1).

8. PSC for all airports other than Tier 1 (KUL) will be lowered.

9. However, a decision on the PSC differentiation in KLIA and klia2 is still pending.

10. The average price cap (effective PSC and parking and landing charges per passenger) for RP 1 is raised to RM43.50 from RM42.90.

• We came away the briefing feeling cautious if the much-talked about regulated asset base (RAB) framework for airport development in Malaysia will get off the ground on 1 Jan 2020 as scheduled. We still see a lot of differences of opinion between the stakeholders, i.e. the government, airport operators and airlines, particularly, on the PSC differentiation between KLIA and klia2. We take comfort that the stakeholders seem to have agreed on most other issues.

• We remain NEUTRAL on the transportation sector. The prospects of airlines and airport operators are favourable backed by tourist arrival growth projected at 12% to 30mil in 2020 by Tourism Malaysia on the back the Visit Malaysia Year 2020. However, this is offset by cost pressure at AirAsia following the sale and leaseback of its aircraft.

Source: AmInvest Research - 1 Nov 2019