• BUY, with new TP (DCF) of MYR9.67 from MYR9.48, 13% upside. The Malaysian Aviation Commission (MAVCOM) has recently published its final Decision Paper regarding aviation service charges (ASC) and the finalisation of supporting mechanisms – set to be enforced from 1 Jun 2024 to 31 Dec 2026. We perceive this development to be in line with our earlier expectations, as outlined in our Dec 2023 report, although the introduction of the transfer Passenger Service Charge (PSC) comes as a pleasant surprise.

• Revision of PSC rates. MAVCOM has implemented several adjustments to the current PSC framework, notably: i) Maintaining domestic PSC at MYR11 for all airports, ii) introducing discounted PSC for transfer passengers, iii) standardising the PSC rates for non-ASEAN and ASEAN destinations, and iv) maintaining a lower international PSC at MYR50 for KLIA Terminal 2 (T2) and other airports. Previously, PSC for international departures varied not only by airport terminals, but also the destination of the flight – MYR35 for ASEAN destinations and MYR50-73 for others. The latest revision aims to establish uniform PSC rates for all international departures, regardless of the destination, at MYR73 for KLIA T1 and MYR50 for KLIA T2/other airports (Figure 3).

• Loss Capitalising Mechanism (LCM). As outlined in the Second Consultation Paper (CP2), MAVCOM is set to implement the LCM during Regulatory Period (RP) 1, effective from 1 Jun 2024. This mechanism will be split into two distinct phases: “Loss/Gain accumulation” phase (RP1) and “Loss Recovery/Payback” phase (RP2). With the LCM, Malaysia Airports will have the opportunity to recover 90% of any regulatory losses incurred during RP1 over a period of up to 10 years, commencing in year 1 of RP2. We view this development positively as this would allow MAHB to pursue necessary investments, services enhancements, and airports development efforts.

• Earnings revisions. Following by the updates to the ASC, our FY24-26F earnings for MAHB are lowered 1-8%. The introduction of transfer PSC and higher parking and landing charges were broadly offset by the reduction in PSC of other categories – particularly International PSC in other airports. Our DCF-derived TP is lifted to MYR 9.67 (baking in a +6% ESG premium) as we are anticipating higher ASC in RP2 and beyond. We maintain our positive stance on MAHB within the sector, based on the highlighted positive developments. Current valuation of 7.7x EV/EBITDA still remains compelling compared to its pre-COVID-19 historical (11.2x) and regional peers (21.9x).

• Key risks for MAHB include higher-than-expected opex, lower-than- expected passenger volumes and ASC, and regulatory changes.

Source: RHB Research - 13 Mar 2024