We are positive on MAVCOM’s second consultation paper, which provides more detailed insight on the implementation of RAB framework. Positive on the proposed rate of return of 10.88% as it is on the higher end of 9-11% as proposed in the first consultation paper. No changes in FY19-20E earnings. Maintain OP with an unchanged TP of RM8.70.

News. Yesterday, MAVCOM released the second consultation paper for the aeronautical charges framework which lays down the key policies for the underlying Regulated Asset Based (RAB) framework that includes, form of control, form of till, starting RAB, regulatory period, grouping of tariffs, user fees, capex responsibility, WACC and more.

A way forward. We are encouraged with MAVCOM’s second consultation paper as the key essence lies in the details for the implementation of RAB in Jan-2020. We believe that the most critical points for AIRPORT would be i) 3-years cycle for first regulatory period (RP1) of RAB as the shorter period allows both AIRPORT and MAVCOM to fine tune aeronautical charges in second regulatory period (RP2) should there be any huge variation on their capex allocation and traffic forecasts, ii) the 10.88% rate of return proposed by MAVCOM seems to be a positive for AIRPORT as the rate is at the higher end of the 9-11% rate of return proposed in the first consultation paper, and most importantly iii) approved capex requirement by MAVCOM instead of AIRPORT’s proposal which we believe is a critical for check and balance in safe guarding other stakeholders’ interest. To recap, AIRPORT included a capex plan of RM10.0b for the period 2020-2022 under RP1, but only RM5.0b is approved by MAVCOM.

Outlook. We are excited with the proposed implementation RAB under the purview of MAVCOM as it promotes better transparency in aeronautical charges. While the second consultation paper by is non conclusive at this juncture, we believe that it is positive for AIRPORT should they be able to execute the approved CAPEX plan of RM5.0b under RP1 upon implementation of RAB based on wacc of 10.88%, which we would look to upgrade our FY20E earnings given the potential return on assets is higher than our current estimates.

Earnings review. For now, there are no changes to our FY19-20E earnings as the second consultation paper is still non-conclusive and it is still subject to changes.

Maintain OP with an unchanged TP of RM8.70 on unchanged FY20E PBV of 1.72x. Our PBV of 1.72x pegged at +0.5SD to its 2-year average. Amid its operational challenges, we think our applied +0.5SD level is reasonable given that the potential revision in PSC charges would help cushion the higher operating costs, and we might review our valuation should there are no major changes to the second consultation paper.

Risks to our call include: (i) lower-than-expected passenger growth, (ii) sharp swing in forex MYR/EUR, and (iii) the unclear structure of the proposed airport REIT which could affect AIRPORT’s development direction.

Source: Kenanga Research - 19 Jun 2019