Post a review to the proposed RAB structure by MAVCOM, we view that MAHB stands to benefit in terms of more airport capacity expansion exercise undertaken by MAHB with acceptable returns on capex spent (as compare to the current OA structure, airport expansion is restricted by government’s budget). MAHB will also enjoy more stable earnings and cash flow under RAB. Major risks for RAB include political interference and low allowable returns set by MAVCOM to benefit airlines and consumers. Our forecast is unchanged and we maintain our BUY rating with DCFE based TP: RM10.00.

IBR/RAB. Incentive-Based Regulation (IBR) or Regulated Asset Base (RAB) is currently under consultation period (with stakeholders) prior to actual implementation in 3Q19. The standard RAB provides a direct link between capital investment and the level of airport charges, which will encourage MAHB (airport operator) to invest on capacity expansion and receive an acceptable level of return on assets. Any capex expansion will be funded by user of the airports as opposed to the current system where airport expansion is financed by the government through the people’s money (not everyone is an airport user).

Main features. The regulatory duration of RAB will be 3-years period. MAHB will be able to determine its own set of airport charges (passenger tariff and aircraft landing and parking charges) and introduce new charges. The structure will also allow for differentiated charges for airports of different service levels and infrastructure. However, the allowable airport charges are subject to MAVCOM’s review and stakeholders’ consultation on MAHB’s Business Plan (operational costs) and Capital Investment Plan (capacity expansion costs).

Calculation of RAB. The fixed asset base of MAHB includes intangible assets (linked to concession and accounting rules) and tangible assets (PPE), which arrives at RM8,355.6m (based on FY17 financials). As MAHB embarks on capex, the asset base will increase and subsequently uplift net earnings. Based on “single till” structure (Figure #1), MAHB’s regulated revenue will include aeronautical charges and non aeronautical charges (including Hotel Sama-Sama and Retail Eraman) and taking into account of total operating, maintenance and depreciation/amortization costs. MAHB associates, plantation and land development will be excluded from the calculation.

Prescribed WACC. MAVCOM has chosen the real pre-tax WACC methodology to account for the effective tax impact on MAHB. Based on MAVCOM’s assumptions (Figure #2), the range of real pre-tax WACC is 5.8% - 7.7% (translating into range of nominal pre-tax WACC of 9.0% - 11.0%).

HLIB’s view. We are relatively positive with the structure of RAB, which allows MAHB to embark on future capital expansion with acceptable returns as compared to the current Operating Agreement structure, which capacity expansion is restricted by government’s budget and thus limiting the growth potential of MAHB. With RAB in place, MAHB will be able to decide its own growth and benefit from stable cash flow and returns. MAVCOM explained that the airport charges rate determined under RAB will be gazetted under the law and serve as a benchmark for any dispute between MAHB and airport users (including airlines).

HLIB’s concern. We believe the biggest hindrance to RAB is the political will of the new government in allowing possible steep fluctuation in airport charges (due to high committed capex of MAHB) as well as differentiated airport charges at different airports (due to different grouping/cluster). Furthermore, MAVCOM may set WACC at a lower level (to the detriment of MAHB) in favour of airlines and passengers. The existing investors of MAHB may have to accept overall lower rate of returns due to capping of potential earnings upside in the future (which is supposed to offset the lower earnings/losses at the starting point of investments i.e. KLIA2).

Forecast. Unchanged.

Maintain BUY, TP: RM10.00. We maintain BUY recommendation on MAHB with unchanged DCFE-derived TP of RM10.00. MAHB stands to enjoy higher growth potential and stable earnings and cash flow under RAB structure, while ISGA operations remain on track for turnaround in 2018.

Source: Hong Leong Investment Bank Research - 24 Oct 2018