INVESTMENT HIGHLIGHTS

• Terms of the approved OA extension laid out which includes the classification of airports into regional groupings

• Regional grouping of airports indicates progress towards the RAB framework and also promotes sustainability of development plans in the long term

• Proposed departure levy to have contained impact on passenger traffic based on regional peers

• Earnings estimates slightly revised upwards after imputing audited annual report figures

• Ascribing a higher discount rate due to sentiment being dragged by lingering policy risk

• Maintain BUY with an adjusted TP of RM8.90 per share

New terms for the approved OA extension. MAHB earlier obtained an approval for the extension to its operating agreement (OA) for 39 airports in Malaysia by the Government of Malaysia (GOM) in December 2016. The extension entails an additional 35 year period until February 2069 on top of its current 25 year concession which ends in 2034. However, the GoM’s approval letter then did not include any terms. The latest announcement on the OA laid out the terms for the extension which includes the introduction of four new OAs for; (i) KLIA, (ii) Designated Airports in Peninsular Malaysia, (iii) Sabah Airports and (iv) Sarawak Airports. In comparison previously, there were only two OAs; one for KLIA and another for the non-KLIA airports.

Inching closer to the RAB framework. With more OAs based on regional groupings, MAHB would be able to source for suitable partners according to the requirements of a particular region. Moreover, adjustments can be made for price cap values, associated tariffs and charging levels according to each regional grouping. This would be based on the capital expenditure which will be provided by MAHB, aligned with the spirit of the upcoming Regulatory Asset Base (RAB) framework. As such, we believe such arrangements would promote further sustainability and flexibility for MAHB’s development plans to improve airport and infrastructure.

Separately; concerns from the proposed departure levy. Latest news indicates that the proposed international departure levy (RM20 for ASEAN destinations; RM40 for non-Asean countries) would likely take effect from August 2019 after the Hajj season concludes. This has raised a concern towards Malaysia’s competitiveness in the tourism industry and the passenger traffic flowing to Malaysia.

Possible scenarios for departure levy implementation. In our view, there are two possible scenarios on how the departure levy would take into effect. First scenario; the international departure levy would be collected at airports for passengers who purchased flight tickets prior to the implementation date. Meanwhile, tickets bought post-implementation date will already have the levy priced in the airfare.

Another scenario would be an exemption for passengers leaving on or after the implementation date using an air ticket issued/purchased before that date. The latter scenario has already been adopted by Japan for its JPY1,000 departure tax effective 7 January 2019. Therefore, we strongly believe that the latter would be taken into consideration by the Government for the implementation of the departure levy.

Second scenario could possibly boost ticket bookings in the short term. Assuming the second scenario will be adopted by the Government with the announcement made one or two months before the effective date, we believe that ticket bookings will be boosted in the short term. This is due to the fact that passengers would want to avoid paying the departure tax levy before the implementation date. As for a longer time horizon, we believe the impact of the departure levy on passenger traffic is still contained as the amount makes up a small portion of the total airfares for international destinations in general.

Analysing impacts of regional peers that have implemented the departure levy. Based on our analysis, countries such as Thailand, Australia and Hong Kong which have imposed departure levies did not experience a decline in passenger traffic. For instance, Thailand, revised its international departure tax from THB500 to THB700 from February 2007, but the number of international departures rose by +8.9%yoy. While international departures took a dip in 2008 and 2009, this was mainly attributable to the political turmoil faced by Thailand during that period which adversely affected tourism sentiment. Later in 2010, international departures rebounded by +8.0%yoy and thus, muting the impact from the hike in Thailand’s departure tax.

Source: MIDF Research - 15 Apr 2019