Investment Highlights

• We maintain HOLD on Malaysia Airports Holdings (MAHB) and its fair value (FV) of RM6.80/share, pegged to FY23F PE of 22x at its 2-year FY18–FY19 pre-pandemic average. Our FV also incorporates a 3% premium to account for our 4-star ESG rating (Exhibit 6), underpinned by the group’s initiatives to increase the usage of renewable energy.

• MAHB continued to deliver improved passenger statistics in July 2022 with total passenger volume in YTD July FY22 soaring 2.8x YoY, translating to an impressive recovery of 52% from 7M2019. (Exhibit 2). In addition, the daily international passenger movements across airports in Malaysia kept their steady recovery momentum, averaging 53K in July 2022, which was 35% of July 2019 level.

• International passenger volume is also set to rise further with increasing seat capacity by airlines in anticipation of more robust air travel demand. We gather that domestic seat capacity is expected to reach 90% of pre-Covid levels and 50% for the international segment from July onwards.

• Hence we retain our forecasts as we expect a stronger QoQ performance in its upcoming 2QFY22 results announcement scheduled on 25 Aug 2022 with narrowed losses on the back of a gradual improvement of passenger traffic.

• Meanwhile, the Malaysia Aviation Commission (Mavcom) has released a consultation paper related to the long-term framework for the regulation of aviation service charges which proposed to keep airport tariffs at current levels (adjustable based on inflation rate).

• The proposal, which involves a deferred implementation of the cost-based regulated asset base (RAB) framework in setting airport tariffs, mainly aims at mitigating a sharp rise in airport charges amid lower and unpredictable passenger volume. Recall that the RAB framework generally fixes airport charges based on regulated revenue per passenger (Exhibit 3).

• Assuming that other components of the RAB framework, including operating costs and asset base remain largely unchanged, the depressed passenger volume currently compared to pre-pandemic levels would inflate the regulated revenue per passenger which eventually leads to materially higher airport charges.

• Mavcom’s analysis indicates that the average passenger service charge (PSC) under the RAB framework is likely to be 2–3x higher than the current PSC. If implemented, we estimate that this could bump up MAHB’s FY23F– FY24F earnings by 17–45%. However, if passenger traffic recovers to pre-pandemic levels over the longer term, our preliminary analysis suggests that the PSC will moderate by 28–35% with minimal impact to earnings.

• Hence Mavcom suggests keeping the airport tariffs at current levels after adjusting for inflation rate for the first regulatory period (RP1) spanning from 2023 to 2025 with the RAB framework coming into force in the second regulatory period (RP2) from 2026 to 2028.

• In the event that MAHB incurs losses (calculated from the sum of operating costs, depreciation, and allowed return on capex minus total revenue) as a result of the unchanged tariffs in the RP1, Mavcom also proposed a loss capitalisation mechanism which will keep track of total accumulated losses in the RP1 and subsequently recover those losses via further upward adjustment of tariffs over a 10-year period starting from 2026.

• Mavcom also proposed a 90% sharing rate for the cumulative losses incurred during the RP1 which implies that MAHB will be able to recover up to only 90% of the total losses and bear the remaining 10% as a provision to incentivise cost reductions. On the contrary, if the company manages to record profit in the RP1, it could only keep 10% of the profit, with the remainder being returned to consumers in the form of lower airport charges in the future. Our forecast assumptions have not incorporated any tariff revision at this juncture.

• While we applaud Mavcom’s proposals designed to encourage efficient airport investment and operation while ensuring stable airport charges imposed on consumers, we are concerned with the deferred implementation of the RAB framework which could negatively impact MAHB’s cash flow capabilities to fund its massive maintenance and expansion capex without an increase in tariffs. We highlight that Mavcom’s proposals may be subject to further changes as it is still extensively engaging with key stakeholders before finalising the tariff rates for RP1.

• Nonetheless, MAHB remains confident in implementing its planned capex without higher airport charges, mainly by prudent planning and execution of maintenance and expansion projects. For instance, for its KLIA Aerotrain project with an all-in cost of RM743mil, MAHB is only required to fork out RM100–150mil as upfront payment as it will start paying the RM350mil construction cost on a staggered basis across 6 years after the project completion in late 2025 or early 2026. Meanwhile, the remaining RM200mil which is earmarked for maintenance costs will be paid over a 10-year period from 2025 to 2034.

• We also note that the group has several planned maintenance and expansion projects in the pipeline, including the upgrade of baggage handling systems within the airport network as well as capacity expansions for airports in Langkawi and Penang. Despite the massive funding required, we expect the group to preserve its balance sheet health and stable dividend payouts, aided by prudent capex spending and post-Covid earnings recovery.

• The stock currently trades at a fair FY23F PE of 21x, near its 2-year FY18–FY19 pre-pandemic average. Therefore, we view its upside potential to be limited at this stage.

Source: AmInvest Research - 22 Aug 2022