MAVCOM reaffirmed the implementation of RAB model framework-led tariff on aeronautical charges or PSC for Malaysia Airports Holdings Berhad (MAHB) and reiterated its stance as a statutory power to set the PSC with a WACC of 10.88%. We raise our FY20E net profit forecast by 7% due to higher passenger forecasts in anticipation of higher-than-expected tourists’ arrivals from the Visit Malaysia Year (VMY) in 2020. BUY TP of RM9.50 based on unchanged 22x FY20E EPS (at 5-year historical forward mean) which is at a 20% discount to regional peers’ average to reflect MAHB’s relatively smaller market capitalisation. We like MAHB as an attractive proxy play on the propensity for air travel in the region due to rising per capita income and it is also well-entrenched because of its monopolistic position.

Malaysia Aviation Commission (MAVCOM) reaffirmed the implementation of Regulated Base Asset (RAB) model framework-led tariff on aeronautical charges or Passenger Service Charge (PSC) for Malaysia Airports Holdings Berhad (MAHB) and reiterated its stance as a statutory right to set the PSC due to be implemented for FY20 to FY22 with a WACC of 10.88%. Due to the lower capex of RM4bn (previously RM5b) and lowered traffic assumption for 2018-2022 CAGR of 4.9% (vs. 5.7% in June consultation paper), regulated revenue per pax is raised from RM42.90 to RM43.50 for year 2020 till end 2022. Bulk of the capex estimated at 70-80% is earmarked for KLIA 1 and 2.

MAVCOM reiterated that PSC for all airports other than KLIA 1 and 2 expected to be reduced. We are positive since combined KLIA 1 and 2 international accounts for estimated 45% of total passengers which yields are higher. The indicative pre-tax WACC of 10.88% is higher than current airport aeronautical ROA of 5.3%, indicating earnings accretive effect.

According to MAHB, based on prevailing economic conditions and the airlines seat capacity offered, Malaysia’s passenger traffic in 2019 is expected to grow by 5.4% with international and domestic passenger traffics growing at 2.3% and 8.8%, respectively, in line with our forecast.

Source: Rakuten Research - 1 Nov 2019