INVESTMENT HIGHLIGHTS

• Recalculation of price cap would be allowed if the deviation of the actual from the forecasted traffic exceeds ±10%.

• Implementation of a dual till mechanism is inappropriate at the moment due to the lack of available data to allocate costs and assets for aeronautical and non-aeronautical operations

• RAB framework is expected to boost EBIT for MAHB’s airport services

• Our preliminary analysis indicates that MAHB would recognise an additional PSC revenue of up to RM112.0m based on the three options its proposed for tariffs

• Announcement for revised charges is slated for October 2019

• All in, the latest changes proposed in the consultation paper signals the certainty of the RAB framework to be implemented

• Maintain BUY with an revised TP of RM9.43 (from RM8.80) per share

Price cap recalculation for extreme events. Based on the Malaysian Aviation Commission’s (MAVCOM) second consultation paper for the framework of aeronautical charges, MAHB is allowed to recalculate the price cap should the actual traffic deviate by more than ±10% (deemed as an extreme event; war and extraordinary meteorological conditions) from the forecasted traffic on a cumulative basis over the course of the price cap period. For illustrative purposes, if the cumulative deviation between actual and forecasted traffic for the first two years (out of the three years of the Regulatory Period 1 (RP1)) exceeds 10%, a recalculation of the price cap would take place and will be reflected in the third year of RP1. Comparatively, if the deviation of the actual traffic from the forecasted traffic was within ±10% range, MAHB would be able to either keep the upside variance or bear the downside variance. We believe that such mechanisms prevents a moral hazard from MAHB from excessively under or over-stating its traffic forecasts while ensuring a fair level of returns.

Prospects of a dual till mechanism. It is firm that a single till mechanism will be implemented for RP1 from 2020 to 2022. Meanwhile, the prospects of a dual till mechanism which considers costs and assets for both aeronautical and non-aeronautical services for the RP2 seems to be a bit ambitious. The reason being is the lack of available data to allocate the costs and assets of the aeronautical and non-aeronautical operations.

A fairer valuation of the regulated asset base. MAVCOM proposed to use a regulated asset base of RM8.3b as of 31 March 2019. We opine that this should be higher to include the historical user fees worth more than RM2.0b which MAHB has paid to the government in return for the use of its assets which were expensed off and not capitalised.

Source: MIDF Research - 1 Jul 2019