The new terms for the operating agreements (OA) between the government and AIRPORT mildly lighten the airport expansion capex burden for the latter. However, the restructuring of the airport industry through clustering could mean that AIRPORT will have to contend with competition from new operators. Pending more details of the OA, we maintain our forecasts, TP of RM7.00 and MARKET PERFORM call.

The new material terms for the OA between the government and AIRPORT to operate, manage, maintain and develop 39 airports and Short Take Off and Landing (STOL) airports until 2069 (OA 2023) are as follows:

1. the government and AIRPORT have the flexibility to fund airport developments either using government allocations through development expenditure (DE) or AIRPORT through any suitable investment recovery model mechanism, with the weighted average cost of capital (WACC) to be determined only when at project implementation;

2. the establishment of the Airport Development Fund (ADF) to receive contributions from airport users, the public and also airlines;

3. 50% of the Passenger Service Charge (PSC) component that is considered in the calculation of the User Fee will be channelled to the ADF trust account. The percentage contribution will be reviewed every three years. For illustration purposes, a RM1b airport revenue will translate to a RM24m contribution to the ADF. This is based on PSC revenue making up 40% of total airport revenue and a user fee rate of 12%. Only user fees on PSC revenue will be subject to contribution to the ADF and the proposal entails half of these to go into the fund (RM1b x 40% x 12% x 50% = RM24m).

4. The government has the right to restructure the airport industry through clustering, carving out, divestment of airports, closure of existing airports or terminals or the restructuring of the ownership of any of the facilities subject to mutual agreement with AIRPORT.

On one hand, a lightened burden on massive capex, particularly for airport expansion and maintenance, is positive to AIRPORT. On the other hand, the opening up of the industry could mean AIRPORT will face competition from new operators that are likely to be set up via a public private partnership model, in our view. There is a strong belief that the private-public partnership model could hasten the development and expansion of airports nationwide.

Outlook. We project tourist arrivals in Malaysia to jump four-fold to 9.6m in 2023 from an estimated 2.5m a year ago (see chart on the next page) thanks to: (i) the return of both business and leisure air travel globally as the pandemic comes to an end, (ii) the revocation of all on-arrival quarantine and testing requirements in Malaysia from 1 Aug 2022, and (iii) the gradual reopening of China which historically contributed to an estimated 12% of total tourist arrivals in Malaysia.

This should underpin growth in AIRPORT’s passenger throughput demand in 2023. We expect traffic trajectory to grow in subsequent months as airlines continue to reactivate more aircraft to match increasing demand. Amplifying traffic growth trajectory is aircraft movements that are pointing towards increased medium and long haul flights to Perth, Sydney and Auckland, Southeast Asia and South Asia destinations. Recently, KL International Airport saw the return of Kuwait Airways after a seven-year hiatus, while two other foreign carriers i.e. KLM Royal Dutch Airlines and All Nippon Airways, will resume non-stop flight operations to Amsterdam and Tokyo, respectively, after temporarily ceasing operations due to COVID-19 pandemic.

In addition, Malaysia Airlines increased its flight frequency to Tokyo from November 2022, in anticipation of the surge in travel demand following the reopening of Japan's borders to international travellers. AirAsia Group meanwhile is focusing on its medium haul operations by increasing its Malaysia AirAsia X flights to 44 weekly across 10 routes in November 2022.

We like AIRPORT for: (i) it being the dominant airport operator in Malaysia and one of the largest in Turkey, (ii) being a good proxy to the recovery of air travel and tourism locally, regionally and globally, and (iii) its strong shareholders who have demonstrated unwavering support through thick and thin (including during the pandemic and a massive cash call in 2014), However, recent proposal to keep airport tariffs status quo could work against AIRPORT’s ability to generate enough cash flow for capex purposes, particularly for airport expansion and maintenance. While MAVCOM also proposes a mechanism for AIRPORT to recoup losses incurred during RP1 in RP2, we are concerned over AIRPORT’s cash flow over RP1. While the proposals in the MAVCOM consultation paper are not cast in stone, they do significantly raise AIRPORT’s earnings risk over the medium term.

Our TP is based on 22x FY24F EPS which is at a 40% discount to closest peer Airport of Thailand due to its smaller market capitalisation. Note that Thailand’s tourism revenue is 3x larger than Malaysia. There is no adjustment to TP based on ESG given a 3-star rating as appraised by us (see Page 4).

Risks to our call include: (i) endemic and pandemic occurrences deterring air travel, (ii) unfavourable terms for airport operations, and (iii) risks associated with overseas operations.

Source: Kenanga Research - 10 Feb 2023