KEY INVESTMENT HIGHLIGHTS

• MOT confirms merger between MAVCOM and CAAM; MAVCOM’s function to be transferred to CAAM

• Objective of rationalization is to increase operational efficiency and optimize human resources

• RAB framework may be put on the back burner but we still believe such framework to be essential in Malaysia

• Profitability wise, MAHB’s earnings still expected to grow by +9.3%yoy in FY20 with the absence of a RAB framework

• Earnings estimates unchanged as it did not impute the RAB framework scenario

• Maintain BUY with a revised TP of RM9.10 per share

MAVCOM’s role to be absorbed under CAAM. The Ministry of Transport (MOT) has confirmed that the Malaysian Aviation Commission (MAVCOM) will be merged with the Civil Aviation Authority of Malaysia (CAAM). The plan will see the dissolution of MAVCOM with its role to be undertaken by CAAM. According to MOT, the initiative to rationalise civil aviation regulatory bodies under one entity is not only to optimise human resources and available funds, but also to increase operational efficiency and service provision. Such plans would bring the local aviation industry to the first thrust of the National Transportation Policy 2019-2030 of strengthening the governance to create a conducive environment for the transportation sector.

Implications towards MAHB. With this latest move by MOT, the implementation of the RAB framework will likely be delayed much further than expected. Notwithstanding this, we are of the opinion that a transparent framework like the RAB framework would still need to be incorporated. This is because it inculcates a discipline capex planning while enabling the recoupment of capital expenditure via aeronautical charges. With the fact that the RAB framework shifts the developmental capex obligation from the Government of Malaysia (GoM) to MAHB, we opine that this is a factor to be strongly considered to proceed with the implementation. As stated in our previous results note for MAHB dated November 2019, we reiterate that the authorities would devise sufficient mechanisms for MAHB to recoup whatever charges and returns that will be set should the RAB framework be delayed from 1 January 2020. Under the RAB framework, coming into place with the same WACC of 10.88% as per MAVCOM’s latest consultation paper, we estimate the earnings growth for FY20 to be above 12.0%yoy. Even if the RAB framework does not come into place at all, earnings are still expected to grow at a tune 9.3%yoy in FY20.

Expansion plans also likely to be put on hold. MAHB has received planning permission and early work commencement from local authorities for the Penang International Airport (PIA) expansion. The expansion is estimated to cost around RM800m-RM900m. As the proposed funding for the expansion was fully made under the RAB framework, we expect a postponement on such plans if the RAB framework implementation is delayed.

Earnings estimates. No changes made to our earnings estimates as our model has not imputed the scenario under the RAB framework.

Source: MIDF Research - 13 Dec 2019