The passenger service charges (PSC) for international travel have been standardised (via both upwards and downwards revisions) to RM73 per pax for KLIA Terminal 1, and RM50 per pax for KLIA Terminal 2 and other airports. A new transfer PSC for transit passengers has also been introduced. All in, these changes are earnings accretive to AIRPORT. We raise our FY24-25F net profit forecasts by 12% each, lift our TP by 13% to RM9.00 (from RM8.00) but maintain our MARKET PERFORM call as we believe the earnings upside has been fully priced in.

PSC tariff revision, transfer PSC introduced. The Malaysian Aviation Commission (MAVCOM) yesterday announced the revisions to the Passenger Service Charges (PSC) for the First Regulatory Period (RP1), with effect from 1 June 2024 to 31 December 2026. Specifically, the PSC rates are for international travel i.e. ASEAN and beyond ASEAN. PSC have been unified into a single international departure of RM73 per pax for KL International Airport (KLIA) Terminal 1, and RM50 per pax for KLIA Terminal 2 and other airports. MAVCOM is also introducing a transfer PSC for passengers transiting through a Malaysian airport. The rate for domestic travel through all airports is RM7, while the rates are RM42 for international travel through KLIA Terminal 1 and RM29 for international travel through KLIA Terminal 2 and other airports. It has allowed the other airports not operated by subsidiaries of Malaysia Airports Holdings Bhd (Malaysia Airports (Sepang) Sdn Bhd and Malaysia Airports Sdn Bhd), namely the Senai International Airport (JHB), Kerteh Airport (KTE), and Tanjung Manis Airport (TGC), to propose tariffs for RP1 to the Mavcom.

This latest PSC tariff rate is status quo for KLIA Terminal 1. For KLIA Terminal 1, there was an increase in PSC for ASEAN by 109% from RM35 to RM73/pax. However, in Terminal 2, PSC rate for ASEAN is higher by 43% from RM35 to RM50 per pax. On the contrary, PSC rate for beyond ASEAN (non-ASEAN) was lowered by 32% from RM73 to RM50.

We are positive on this latest development which is expected to be earnings positive to AIRPORT. Nevertheless, in our view, we believe this latest tariff rate might not be sufficient for AIRPORT to raise sufficient cash flows given the urgency for airport expansion and maintenance capex in Malaysia to enable AIRPORT to accumulate the required cash for capex purposes.

In a Third Consultation Paper (CP3), the Commission will provide further details on the longer-term regulatory framework that will apply from RP2.

The Commission will defer the transition to a cost-based approach to setting aviation charges until RP2 (commencing 1 January 2027).

MAVCOM’s view is consistent with the Second Consultation paper that cost-based approaches to setting tariffs would be impractical for RP1 when demand is low and uncertain as the sector continues its slow recovery, hence demand over the course of RP1 will continue to be below pre-pandemic trends, meaning that average costs will likely be higher than those seen prior to the pandemic. As such, there is a significant risk of understating or overstating AIRPORT’s average costs.

This could result in a significant increase in tariffs. The Commission proposes to reassess the timing of this transition prior to the start of RP2.

Forecasts. We raise our FY24F-FY25F net profit by 12% each, having factored in the new rates and transfer PSC.

Valuations. We raise our TP by 12% to RM9.00 (previously RM8.00) based on 22x FY25F EPS at a 40% discount to its closest peer Airport of Thailand due to its smaller market capitalisation. Note that Thailand’s tourism revenue is 3x larger than Malaysia’s. There is no adjustment to TP based on ESG given a 3-star rating as appraised by us (see Page 4).

Outlook. We expect business and leisure air travel to continue to recover throughout FY24. According to our in-house projection, tourist arrivals in Malaysia are expected to jump 35% to 27m (consistent with Tourism Malaysia’s projection to return to pre- pandemic levels) in FY24 from an estimated 20m a year ago (see Exhibit 2). A key driver is Chinese tourists that had historically contributed to an estimated 12% of total tourist arrivals in Malaysia. Furthermore, tourist arrivals is expected to be boosted by the 30-day visa-free regime for Chinese and Indian visitors to Malaysia starting from Dec 2023 and China, allowing Malaysian inbound visitors 15 visa-free days between 1 Dec 2023 and 30 Nov 2024.

This should underpin growth in AIRPORT’s passenger throughput demand in 2024. We expect traffic trajectory to grow in subsequent months as airlines continue to re-activate more aircrafts 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. 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 the COVID-19 pandemic. In addition, Malaysia Airlines has increased its flight frequency to Tokyo from November 2022, meeting the surge in travel demand after Japan reopened its borders to international travellers. AirAsia Group meanwhile is focusing on its medium-haul operations and had increased its Malaysia AirAsia X flights to 44 times weekly across 10 routes from Nov 2022.

Investment case. We like AIRPORT for: (i) it being the dominant airport operator in Malaysia and one of the largest in Türkiye, (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, the recent revision to airport tariffs (despite operating cost rising at a much faster pace) 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 in RP2, we are concerned over AIRPORT’s cash flow over the RP1 duration. Maintain MARKET PERFORM.

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 - 13 Mar 2024