Extension of concession

Malaysia Airports (MAHB) reported that the company had obtained approvals from the Ministry of Transport Malaysia in relation to:

1. Extension period of the operating agreement for KLIA between the government and MAHB and Malaysia Airports Sdn Bhd for an additional period of 35 years, ie: from the existing 25 years to 60 years; and

2. Extension period of the operating agreement for designated airports between the government and MAHB and Malaysia Airports Sdn Bhd for an additional period of 35 years, ie: from the existing 25 years to 60 years. Note that a negotiation committee, comprising members from the Ministry of Transport, Ministry of Finance, MAHB and other relevant government agencies, will be established to negotiate new terms and conditions (T&Cs) of the respective agreements.

Our view

The concession extension of additional 35 years is a good news for the company but the market has priced in the bulk of it, in our opinion. MAHB has been actively negotiating with the government for the extension of the operating agreement since 2010, when the company was tasked to construct KLIA2. Given the significant amount involved in KLIA2 projects, we believe the investment fraternity would have already factored in the extension of operating agreements into forecasts and valuations. However, the new T&Cs, which are currently in negotiation stage, could be omitted.

For the new agreements, we believe the main concerns would be those new T&Cs that may affect future PSC and user fee structures. Similar to the existing operating agreement (see Appendix A), which superceded the first concession agreement in 2009, the new agreements will be replacements for existing operating agreements that may render existing PSC and user fee structures void.

While the negotiation committee is working on the new T&Cs, changes in some of the following T&Cs would be deemed as re-rating catalysts for MAHB:

1. Change in current user fee structure. Based on the current structure, the user fee will creep up to 15% by 2034, which would serve as a huge dampener to future profit growth;

2. Change of BOT structure for future new assets. Currently, all airport assets would be transferred to the government at zero cost when the concession expires. It would be a big boost to the company’s valuation if MAHB is able to negotiate for a change of BOT structure to net asset value structure for new assets to be constructed in the future.

However, any unfavourable changes to the benchmark PSC (see Appendix A), which result in lower PSC collections in the future will be deemed as de-rating catalysts.

Forecast

For the time-being, we assume status quo on all T&Cs as stipulated in the existing operating agreements. As such, we maintain our FY16-18 earnings projections. Note that the new agreements would only be enacted in 1-2 years period.

Meanwhile, we believe the dispute between MAHB and Petronas Dagangan, claiming RM456mn in relation to the shortened duration of Airport Facilities Agreement would now become a non-event (see report dated 7 April 2016).

Valuation

We are of the view that the new agreements would likely be favourable to MAHB. Our basis is premised on: 1) negotiation committee does not have any airline operators, which may suggest lower PSC in the future; 2) the government may agree to lower the user fee structure and Khazanah may take the opportunity to divest its stake in MAHB further when MAHB share price increases.

In our valuation model, we have assumed MAHB operations to continue until 2069. However, as we believe these new agreements would uplift market sentiment underpinned by favourable terms as highlighted above, we upgrade MAHB to Buy (from hold previously) with a new DCF valuation of RM7.66/share (from RM6.64 previously) based on revised discount rate of 11%.

Source: TA Research - 6 Feb 2017