KEY INVESTMENT HIGHLIGHTS

• RAB framework still in progress for January 2020 implementation

• Single till approach and price cap control remains

• A more manageable capex to be laid out for RP1

• More upside for price cap from landing and parking charges

• New tariffs to be set via network approach

• Last major hurdle to resolve is the PSC for KLIA Main Terminal and klia2

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

RAB framework still in progress for January 2020 implementation. We attended an analyst briefing organised by the Malaysian Aviation Commission (MAVCOM) to obtain updates on the status of the Regulated Asset Base (RAB) framework. MAVCOM emphasised that the RAB framework is still in progress to be finalised for implementation by 1 January 2020 along with some other points highlighted below.

Single till approach and price cap control remains. It is firm that a single till mechanism will be implemented for Regulatory Period 1 (RP1) from 2020 to 2022. Meanwhile, the prospects of a dual till mechanism which considers costs and assets for both aeronautical and nonaeronautical 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. In terms of form of charges control, the price cap remains the choice of the commission providing the most incentive for out-performance relative to targets set by the RAB framework.

A more manageable capex to be laid out for RP1. MAVCOM also highlighted that the capex to be funded by MAHB in RP1 has been adjusted downwards to RM3.9b compared to RM5.1b which was proposed by MAVCOM in the June 2019 consultation paper. This was due to revision of project timelines and estimated costs. Having said that, the revised capex has the main aim of achieving higher terminal optimisation for KLIA Main Terminal 1 and expansion for Penang International Airport (PIA). We believe that this amount of capex is more manageable as it will lessen the burden MAHB’s net gearing which stood at 0.4x as of 30 June 2019. A lower capex will translate into a lower return of capital derived by applying the WACC of 10.88% proposed by MAVCOM to the RAB closing balance for a particular year. Nevertheless, the average price cap per departing passenger for RP1 will increase to RM43.50 from RM42.90. This is made possible via the revised CAGR of 4.9% for passenger traffic growth from 2018 to 2022 (vs. 5.7% in June 2019 consultation paper), a target which we are confident that MAHB can comfortably achieve. MAHB is allowed to keep the revenues generated should it exceed the passenger traffic target set by the commission.

Source: MIDF Research - 1 Nov 2019