Post attending the consultation session with MAVCOM, we are still relatively neutral on the RAB structure. Key takeaways include: 1) current pre-tax WACC of 10.88% for RP1 is likely to drop in subsequent reviews, due to potentially more stabilized MAHB share price movement, lower industry benchmark and ICAO recommendation; 2) hybrid of price cap (actual traffic within 10% of forecast) and revenue cap (actual traffic varies more than 10% of forecast); and 3) MAHB to return excess revenue in the event actual capex spending behind proposed amount; and 4) tariff structure still under study (we prefer holistic approach). We maintain HOLD rating on MAHB with unchanged DCFE based TP: RM7.80, as we believe while MAHB’s earning will be stable under RAB, MAHB’s earnings growth will be capped by the continuous RAB reviews.

WACC of 10.88% not for long. MAVCOM revealed that pre-tax WACC of 10.88% under regulatory period 2020-2022 (RP1) is based on a relatively high equity beta of 1.2x, whereas comparable airports comparison (including AOT and AENA) ranges at lower 0.6-0.7x. Moreover, the beta reference is based on MAHB’s share price movement for the past 3 years, which arguably biased upwards for the inclusion of higher risk ISGA. At the moment, MAVCOM is still undecided if they will consistently apply historical MAHB share price movement for future beta calculation or apply different approaches such as industry benchmark, ICAO recommendation etc. MAVCOM concurred that beta is likely to be adjusted lower in the longer term. Based on comparable beta of 0.6-0.7x, the pre-tax WACC will drop to 8.10-8.57%.

Hybrid of price cap and revenue cap. Should traffic movement vary more than 10% of the cumulative forecasts, MAHB or airlines have the opportunity to apply to MAVCOM to recalculate the tariff under the price cap mechanism, in order to clawback/compensate MAHB for any excess/shortfall in revenue. The clawback/compensation is based on revenue computation (not net earnings) for any amount in excess of the 10% variation in traffic forecast. Therefore, MAHB’s risk is relatively capped within 10% variation in traffic forecasts, as MAHB’s revenue is based on price cap mechanism, whereas variation of more than 10% in traffic forecasts will limit MAHB’s revenue based on revenue cap mechanism. However, the structure and timing implementation of the clawback/compensation are still subject to further study, mainly due to the short duration of the 3 years regulatory period.

Capex spending. While RM5bn looks aggressive for MAHB’s capex under RP1, MAVCOM clarified that capex calculation by end 2022 will be based on cashflow basis. Any underspending of capex (vs. proposed) by end 2022, MAHB will need to return the excess in revenue in the following RP2.

Tariff setting. MAVCOM is still undecided on the breakdown of tariff structure, whether it should be based on holistic approach, segmented approach or cluster approach. We believe that a holistic approach would be more appropriate at the moment and easier to be accepted by the many stakeholders. MAVCOM also suggested that law amendments would be needed in order to enforce the tariff structure. However, there is still no update on departure levy, given that the levy is a directive under MoF and not within MAVCOM’s jurisdiction.

Forecast. Unchanged.

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. We believe further restructuring of RAB structure and allowable WACC in subsequent regulatory period will post future risk to MAHB.

Source: Hong Leong Investment Bank Research - 1 Jul 2019