WACC stays at 10.88%, regulated revenue per pax increased from RM42.90 to RM43.50. Malaysia Aviation Commission (MAVCOM) reaffirmed the implementation of Regulated Base Asset (RAB) model framework-led tariff on aeronautical charges or Passenger Service Charge (PSC) for Malaysia Airports Holdings Berhad (MAHB) and reiterated its stance as a statutory right to set the PSC due to be implemented for FY20 to FY22 with a WACC of 10.88%. Due to the lower capex of RM4bn (previously RM5b) and lowered traffic assumption for 2018-2022 CAGR of 4.9% (vs. 5.7% in June consultation paper), regulated revenue per pax is raised from RM42.90 to RM43.50 for regulatory period of year 2020 till end 2022. Bulk of the capex estimated at 70-80% is earmarked for KLIA 1 and 2.

PSC for all airports other than KLIA 1 and 2 expected to be reduced. MAVCOM reiterated that PSC for all airports other than KLIA 1 and 2 expected to be reduced. We are positive since combined KLIA 1 and 2 international accounts for estimated 45% of total passengers which yields are higher. The indicative pre-tax WACC of 10.88% is higher than current airport aeronautical ROA of 5.3%, indicating earnings accretive effect.

VMP 2020 to boost passenger traffic growth. According to MAHB, based on prevailing economic conditions and the airlines seat capacity offered, Malaysia’s passenger traffic in 2019 is expected to grow by 5.4% with international and domestic passenger traffics growing at 2.3% and 8.8%, respectively, in line with our forecast. We raise our 2020 overall passenger traffic growth from 4.5% to 6.4%. We also upgrade our expected passenger traffic at KLIA’s main terminal building (MTB) and other airports, to grow 7% in 2020 and expect passenger traffic at the KLIA2 to grow 8% in 2020 underpinned by tourism activity emanating from VMY 2020.

Heads I win, tails I win. MAHB is well-entrenched because its earnings in the aeronautical segment under the operating agreements are protected from downside. A key component under the operating agreements lies in the Marginal Cost Support Sums (MARCS) system which would compensate MAHB for reduction in aeronautical Passenger Service Charge or ‘PSC’ resulting in PSC rate being lower than the benchmark rate as per the OA due to governmental instructions.

Upgrade from MP to OP. Due to higher passenger growth forecast, we raise our FY20E net profit forecast by 7% by raising our passenger traffic. Correspondingly, our TP is raised from RM8.70 to RM9.50 based on unchanged 22x FY20E EPS (at 5-year historical forward mean) which is at a 20% discount to regional peers’ average to reflect MAHB’s relatively smaller market capitalisation. We like MAHB as an attractive proxy play on the propensity for air travel in the region due to rising per capita income and it is also well-entrenched because of its monopolistic position. Upgrade our call from MARKET PERFORM to OUTPERFORM.

Risks to our call include: (i) lower-than-expected passenger growth, and (ii) weaker-than-expected WACC from the RAB.

Source: Kenanga Research - 1 Nov 2019