Yesterday, we attended MAVCOM’s briefing in regards to the revision of PSC charges and came back feeling NEUTRAL as the new PSC’s are in line with our expectations. The new rates to be implemented starting 1st January 2017 in all airports in Malaysia will have international rates fixed at RM73 (except for KLIA2 where it will be RM50 in FY17 before being equalized in FY18) and domestic rates at RM11. As expected, a new ASEAN segment was introduced with PSC fixed at RM35. While MAVCOM noted the indecision of having the international benchmark rates (from OA 2009) split into ASEAN and long haul international is disconcerting, we choose to maintain our view that international benchmark rates regardless whether ASEAN or not will be maintained at RM71 – allowing MARCS PSC to subsidize AIRPORT for the difference in new ASEAN PSCs (RM35) and current international benchmark rate of RM71. We maintain our NEUTRAL view on AIRASIA operating in KLIA2 as we believe that the effective impact would be minimal as most of AIRASIA’s international flights are flown towards ASEAN countries, which will fall under the new RM35 ASEAN segment – allowing them to keep their competitive pricings. We lowered AIRPORT’s earnings by 10% after adjusting for the difference between the rates announced by MAVCOM versus the ones reported in The Sun in September. Post adjustment, we trimmed AIRPORT’s TP to RM7.31 (from RM7.33 previously) based on 1.58x FY17E PBV with an unchanged OP call. Meanwhile maintain OP call and TP of RM3.82 for AIRASIA. Hence, maintain OVERWEIGHT on the sector.

New PSC rates by MAVCOM. Yesterday, we attended MAVCOM’s briefing where they announced the new PSC rates which will be implemented from 1st January 2017. As expected, the international segment is now broken down into two segments i.e. long haul international and ASEAN destinations. The new rates for long haul international flights are RM73 (+RM8; previously RM65) at all international airports aside from KLIA2 which will be priced at RM50 (+RM18; previously RM32). MAVCOM noted that they plan to equalize KLIA2’s international PSC with all other airports by FY18. Meanwhile, all ASEAN flights from all airports will be fixed at RM35 while domestic flights will be at RM11 (refer overleaf for Table). We understand from MAVCOM that the next PSC review would be in FY18 followed by FY19 and then every 5 years from FY19 in accordance to the Operating agreement 2009.

New MARCS PSC Benchmark rates for ASEAN routes undecided. To recap, AIRPORT currently enjoys additional revenue from MARCS PSC which is a subsidy by the government and the amount subsidized is the difference between the benchmark rates stipulated in the Operating Agreement 2009 and PSC charged to departing passengers. In view of the change in PSCs, MAVCOM noted that the current international benchmark rates for MARCS PSC of RM71 could possibly be split into long haul international and ASEAN where we believe the benchmark rates for ASEAN destination could be fixed at RM35. Should this happen, we are negative as a benchmark rate of RM35 for ASEAN would be significantly lower (by 51%) than the current international benchmark rates AIRPORT is getting (RM71); translating to lower FY17 PSC revenue of c.11% for Malaysian operations. However, we note that this move could mean a termination of the Operating Agreement 2009 set out between the Government and AIRPORT whereby the Government would have to pay a compensation amount to AIRPORT which is to be determined by an independent valuer. Hence, we feel that it is unlikely for it to happen and the MARCS PSC will subsidize the difference between the new ASEAN PSC of RM35 against current international benchmark rates of RM71.

Impact towards AIRASIA in KLIA2. We maintain a NEUTRAL view for AIRASIA as the hike of domestic and international rates for KLIA2 would be minimal considering that most of AIRASIA’s international flights (c.70%) are flown towards the ASEAN region which will fall under the new RM35 ASEAN segment – allowing AIRASIA to keep their competitive pricings. While it is possible that there could be a shift in passengers away from AIRASIA towards other airlines due to the more ‘level playing field’, we opine that AIRASIA has high chances of holding up their passenger numbers citing Malindo Airlines and Tiger Airways’ shift in operations from KLIA2 towards KLIA Main in 15th March 2016. Despite these two operating in the higher PSC KLIA Main, their shifts in operations are evident through improving KLIA Main traffic numbers from April to August showing increasing monthly YoY improvements (+2% to +26%) against negative YoY performance in January-March (-9% to -13%).

Adjust AIRPORT’s FY17 earnings lower. In our sector report dated 26/9/16, we had adjusted our AIRPORT’s earnings estimates higher from RM89m to RM111m (+25%) based on the suggested PSC rates reported by The Sun. However, the new PSC rates announced yesterday differs slightly from rates reported by The Sun whereby KLIA2’s international rates will be priced at RM50 (instead of RM73 as reported by The Sun). Under MAVCOM’s guidance, we only expect KLIA2 international rates to rise to RM73 in FY18. Hence, after adjusting for the differences, our FY17E earnings are brought lower by 10% to RM100m. We note that the worst-case scenario would be if new ASEAN benchmark rates of RM35 are implemented for MARCS PSC without the breach of existing operating agreement – causing further reduction to FY17 CNP to RM72m. Meanwhile, we make no changes to AIRASIA’s earnings forecasts.

Maintain OVERWEIGHT. All in, we are NEUTRAL on the new PSC rates as it is within our expectations. Despite KLIA2’s international rate of RM50 still being lower than all other airports, we note that MAVCOM is planning for a gradual equalization whereby KLIA 2’s international rate is expected to be the same as the rest in FY18. Meanwhile, we choose to remain cautious over the decision to split international benchmark rates stipulated in OA 2009 to ASEAN and long haul international which could be detrimental to AIRPORT’s earnings outlook. Post adjustment to AIRPORT’s earnings, we tweak AIRPORT’s TP lower to RM7.31 (from RM7.33) based on 1.58x FY17E Fwd. PBV with an unchanged OP call. We reiterate AIRASIA’s OUTPERFORM call with an unchanged TP of RM3.82. Hence, we maintain OVERWEIGHT on the Aviation Sector.

Source: Kenanga Research - 1 Nov 2016