INVESTMENT HIGHLIGHTS

• The Government of Malaysia has gazetted the international departure levy which will take effect on 1 September 2019

• Malaysia has one of the lowest departure levies compared to other countries

• Percentage of departure levy from total flight ticket cost is rather insignificant

• As such, the proposed departure levy to have contained impact on passenger traffic based on regional peers

• Maintain BUY with an unchanged TP of RM9.43 per share

Departure levy gazetted. The Government of Malaysia has gazetted the departure levy which will take effect on 1 September 2019. The rates gazetted are shown in Table 1 and differs from what was initially proposed during Budget 2019 whereby there was no classification between economy and premium class passengers. Passengers flying in premium class will have to pay a departure which is more than six times than what economy class pays. In other words, premium class passengers will subsidise economy class passengers given their assumed higher purchasing power.

Exemptions granted to some individuals. Exemptions for the departure levy have also been laid out by the Government of Malaysia. The groups exempted from paying the departure levy are: (i) infant of the age below 24 months; (ii) crew on duty on board an aircraft and (iii) transit passengers not exceeding a 12 hour time frame.

Modes of collection. The Government of Malaysia has not yet given details on how the departure levy will be collected. In our view, there are two possible scenarios on how the departure levy be collected. 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.

Malaysia still has one of the lowest departure levies for economy class. In comparison with other countries such as Hong Kong, Bangkok and Australia, Malaysia still has the lowest departure levy for economy class passengers (for both ASEAN and non-ASEAN destinations) and premium class passengers (for ASEAN destinations). Meanwhile, we noted that the levy for premium class passengers flying to non-ASEAN countries is only lower than what is charged in Australia.

Our view. Based on our analysis, the percentage of the departure levy charged from the total flight ticket is rather insignificant. For instance, for full service carriers such as Malaysia Airlines, the departure levy makes up around 1.1% and 2.5% on average of the flight ticket price for economy class and business class passengers, respectively. The portion of the departure levy from the total ticket price would be smaller for further destinations such as Europe and North America. As for low cost carriers such as AirAsia, the percentage of departure levy from the total ticket price is still immaterial at 1.5% on average for normal fares. Although the percentage is slightly higher at 3.7% for premium flatbed passengers, it is important to note that seats for this class constitute less than 5% of total seats offered for sale.

Limited impact to MAHB even after considering IATA’s analysis. According to a study done by the International Air Transport Association (IATA), the departure levy would reduce the number of international air passengers departing Malaysia of up to 850,000 per year. This would decrease the aviation sector’s GDP growth contribution by up to RM1.7b. Notwithstanding this, the impact towards MAHB’s passenger service change collection would decline by roughly RM46.7m, which is only less than 1.0% of MAHB’s revenue estimates for FY19 and FY20. Our analysis assumes that 47% of international passengers depart for ASEAN destinations while the remaining departs to destinations beyond ASEAN. As such, we are making no adjustments based on the international departure levy towards our earnings estimates in FY19 and FY20.

Reiterate BUY with unchanged TP of RM9.43 per share. Overall, we continue to believe that the departure levy will not be a dampener on passenger traffic growth. This is premised on our latest findings, in addition to our previous analysis highlighted in a report dated 15 April 2019. Therefore, we believe that MAHB will be able to maintain its upward trajectory especially in terms of passenger growth. This is amidst the relaxation of visa policies for Chinese and Indian nationals visiting Malaysia which we opine may be extended in the following year in conjunction with ‘Visit Malaysia Year 2020’. Hence, we reiterate our optimism that MAHB passenger numbers will surpass the 100m mark in 2019, while maintaining a relatively conservative growth rate of 3.5% at 102.5m. As such, we opine that the recent sell down of MAHB shares were unjustified and present an opportunity for investors to accumulate.

Source: MIDF Research - 5 Aug 2019