• Operating Agreements for KLIA and other Designated Airports will be extended by an additional 35 years

• New terms and conditions to be negotiated; key impact to valuation may come from changes in status of MARCS and PSC hike schedule

• Maintain HOLD, RM6.80 TP pending further detail

What’s New

Secures extension to Operating Agreement. Malaysia Airports (MAHB) announced that the Ministry of Transport Malaysia (MOT) has given approval for the Operating Agreements (OA) for KL International Airport (KLIA) and other Designated Airports to be extended by an additional 35 years, i.e. to 60 years from the current 25 years. The approvals are subject to new terms and conditions, for which a Negotiation Committee will be established. This committee will be chaired by the MOT and include representatives from the Ministry of Finance, MAHB and other relevant government agencies.

Our View

Key details yet to be finalised. The need to revise terms and conditions is unsurprising, given the introduction of MAVCOM (Malaysian Aviation Commission) in 2016 which then altered the Passenger Service Charge (PSC) rates. In our view, crucial details for MAHB relate to: 1) Marginal Cost Support Sum (MARCS) – which lets MAHB claim the difference in charged PSCs and Benchmark rates as per the OA given the new ASEAN tier with lower PSC rates. The continuation of MARCS would imply larger financial upside from the PSC revisions made. 2) Timing of future PSC changes, as MAVCOM is not mandated to a fixed revision schedule; whereas previous Benchmark rates were set for 5 years with an agreed formula in place for escalation. Other possible changes include the user fee structure, which is currently at c.11% of core revenue with an annual step-up of 25 basis points with 15% as maximum.

Overall, the extension is positive as it entrenches MAHB’s position as Malaysia’s key airport operator in the coming years. However, key details affecting potential financial impact have not been disclosed, particularly regarding schedules for escalating PSC rates and user fees which will affect the longerterm valuation of its Malaysian operations. We maintain our forecasts, HOLD rating and RM6.80 TP at this juncture pending further announcements and details.

Source: Alliance Research - 6 Feb 2017