INVESTMENT HIGHLIGHTS

• OA extended by 35 years

• Further T&C to be ironed out

• MAHB could record lower amortisation expense

• Maintain BUY with unchanged TP of RM7.60

OA extended by 35 years. MAHB obtained an extension to its operating agreement (OA) for 39 airports in Malaysia by the Government of Malaysia (GOM). The extension entails an additional 35 year period on top of its current 25 year concession, running until 2069. Overall, we are positive on the announcement as it removes uncertainty pertaining to the awarding of the extension.

Further T&C to be ironed out. A committee comprising of representatives from the Ministry of Transport, Ministry of Finance, other relevant agencies and MAHB will be established to negotiate new terms and conditions for the OA. Among critical items to be negotiated include User Fee charges which is a form of royalty paid to the GOM and the Marginal Cost Support Sum (MARCS) which is compensation paid by the GOM for deferments in Passenger Service Charge (PSC) revisions.

MAHB could record lower amortisation expense going forward on its concession assets by as much as 58% as MAHB stretches the useful life from 25 years to 60 years. Having been awarded the OA extension in December 2016, this could have retrospective effect on 2016 numbers resulting in an overestimation of 2016’s depreciation which could lead to an adjustment in 4QFY16 results due to be released in February. We believe that the OA extension could also see resolution to contract disputes including Kuala Lumpur Aviation Fuelling System Sdn Bhd (KAFS)’s demand for RM456mil in compensation.

Maintain BUY with TP of RM7.60 based on our DCF model assuming WACC of 7.7% and Beta of 1.1. We make no changes to our forecasts pending further clarity on T&C and amortisation. Further rerating catalysts for MAHB could come from: 1) Higher than expected capacity addition from airlines; 2) Meaningful third party investments in the KL Aeropolis project; and 3) Further guidance on future PSC revisions.

Source: MIDF Research - 6 Feb 2017