MAVCOM has released an updated consultation paper of Airport RAB, which has highlighted its stance on prescribed pre-tax WACC at 10.88% (lower than MAHB’s proposal of 12.7-14.0%) and planned capex of RM5.0bn (vs. MAHB’s latest proposed capex of RM5.2bn). Nevertheless, MAVCOM has agreed for MAHB’s longer UOP depreciation methodology. MAVCOM has also projected lower traffic assumptions with CAGR of 3.9% for 2018-2022 (vs. MAHB’s 5.7%) with proposed downside protection of passenger traffic. We maintain our HOLD rating with unchanged DCFE based TP: RM7.80, as we believe while MAHB’s earnings will be stable under RAB structure, RAB is still subject to regulatory and political risks as well potential cap on MAHB’s earnings growth.

Prescribed WACC. MAHB has initially submitted for pre-tax WACC of 14.0% (Nov 2018) and subsequently a revised WACC of 12.7% (Jun 2019). However, MAVCOM has maintained its prescribed nominal pre-tax WACC of 10.88% (within its initial guidance of 9.0% - 11.0%).

Depreciation. MAVCOM has agreed to MAHB’s UOP (Unit-of-Production) depreciation methodology as the basis for calculation under RAB framework. The longer depreciation will allow MAHB to earn return on capex spent over a longer gestation period.

Capex. MAHB has initially submitted an aggressive capex plan of RM11.2bn (Nov 2018) under Regulatory Period 2019-2020, which subsequently MAVCOM has cut down the capex plan to RM5bn (see figure #1) on concerns for MAHB’s ability to undertake such a huge capex. Eventually, MAHB has resubmitted a new capex plan of RM5.2bn (Jun 2019), slightly above MAVCOM recommendation (see figure #2).

Pax growth assumptions. MAHB has projected a passenger CAGR of 5.7% for period 2018-2022, while MAVCOM has projected CAGR of only 3.9% (see figure #3). The assumptions of lower passenger CAGR will allow higher opportunity for MAHB to outperform the allowable WACC under price Ccp mechanism. MAVCOM has also proposed that MAHB to be protected under cases of extreme events (e.g. consequences of war, extraordinary meteorological conditions etc.) that could result in MAHB generating significantly lower revenues to the extent that MAHB is not able to cover the necessary operating and capital expenditure. Therefore, MAHB can apply to MAVCOM to recalculate the price cap in the even that actual passenger traffic deviates by more than 10% from the forecast assumed.

New transfer PSC tariffs. MAVCOM has proposed to allow MAHB to introduce tariffs on transfer passengers (this was non-existent under existing tariff structure) for both domestic and international flights, in order to broaden MAHB’s tariff revenue base and partially absorb the higher revenue requirement under RAB structure.

Hike in landing and parking charges. MAHB has proposed to hike aircraft landing and parking charges by 16% in 2020 (the rates were last hiked in stages by 10% p.a. from 2012-2015), given that Malaysia charges are considerably low as compared to the charges imposed by regional airports (see figure #4). The proposed hikes were meant to partially offset the passenger PSC tariffs.

Proposed PSC tariffs. Based on MAHB latest revised proposal in Jun 2019 (based on 12.7% WACC), MAHB has proposed 3 options (see figure #5-7) for PSC tariffs structure (after taking into account of the 16% hike in aircraft landing and parking charges in 2020). Of all the 3 options, MAHB preferred option 2 (involves some degree of cross-subsidizing between each cluster of airports), which will allow for tariffs in other airports to be lower than KLIA.

HLIB’s view. We believe that RAB structure will provide allowable net profit for MAHB’s Malaysia operation at RM680-780m for FY20-22, assuming 70% gearing ratio for the proposed new capex. However, we remain concerned on political interference and regulatory risks with the implementation of RAB, among others include: 1) impending AREIT structure; 2) implementation of departure levy; and 3) differentiated airport charges at different airports (due to different grouping/cluster). Furthermore, MAHB’s balance sheet may be burdened with the high planned capex requirements.

Maintain HOLD, TP: RM7.80. We maintain HOLD recommendation on MAHB with unchanged DCFE-derived TP of RM7.80. While RAB provide earnings certainty to MAHB, the framework will also put a cap on the potential earnings growth of its Malaysia operation and further restructuring of RAB structure in subsequent regulatory periods.

Source: Hong Leong Investment Bank Research - 19 Jun 2019