New Operating Agreement

Malaysia Airports (MAHB) hosted a virtual briefing yesterday to provide further clarifications on the decision paper published by Malaysian Aviation Commission (MAVCOM) as well as the new operating agreement (OA) executed recently, which will affect its future profitability. Key takeaways are below:

Salient Terms

1. The new passenger service charges (PSC, airport tax) have several changes (Figure 1), including i) airport taxes are differentiated on the basis of airports rather than the origin/destination of the flight, ii) implementation of transfer PSC.

Our view: The introduction of transfer PSC is sufficient to alleviate the reduction in income from the novation to the new OA. Note that based on the old OA, the benchmark PSC is due for a hike in Feb-24, which we have factored in an 8% increase. Now, with additional income from transfer PSC, where transfer passengers account for approximately 6% of passenger movements, the change in earnings is negligible.

2. MAVCOM will defer the transition to a cost-based approach until RP2, commencing Jan-27.

Our view: No major surprise as the intention was highlighted in the second consultation paper (refer to MAHB report dated 31 March 2023). In our opinion, this will be the greatest benefit among all as the new tariff structure will eliminate systematic risks and ensure recoverability of future investments which are key to future earnings sustainability. In this cost-based approach, it will also take into account the general market condition as well as MAHB’s financial positions, not just about the inflationary pressure (old OA) on operating expenses.

3. MAVCOM introduces the loss capitalisation mechanism (LCM) in RP1 to complement its decision to defer the cost-based price approach. The LCM will allow MAHB to recover 90% of any regulatory loss it incurred in RP1 to be recovered over a period of up to 10 years starting in year 1 of RP2. A full 100% recovery is possible with consents from other stakeholders.

Our view: The loss refers to the difference between MAHB’s actual economic costs and the actual revenue MAHB earns over RP1. The economic costs are the sum of regulatory depreciation + a return on capital invested + operating expenses + taxes. If the economic costs are higher/lower than the actual revenue, 90% of the loss/income will be shared with passengers and airlines. The WACC and the applicable tax rate have not been finalised. Previously, MAVCOM has proposed a vanilla WACC of 11.4% during the consultation stage.

4. MAVCOM allows MAHB to choose which capex it would like to seek ex-ante approval from the commission. Our view: We are positive that MAHB will have a bigger say on future projects and the associated capex. In our opinion, given the importance of ESG credentials and business sustainability, we believe MAHB would prioritise projects that are deemed critical to the nation and Rakyat, instead of focusing mainly on projects that will maximise its near-term profit.

5. The MARCL PSC (compensation for the difference between actual and benchmark PSC) and user fee (government’s entitlement to MAHB’s revenue in airport operations in Malaysia) structures are still there. 50% of the user fee will be channelled to the Airport Development Fund (ADF) and the rate of contribution will be reviewed every 3 years.

Our view: The establishment of ADF can expedite the development of airport projects in the future especially those unviable projects. Also, it would help MAHB to undertake mega projects, eg. Penang Airport expansion, as ADF serves as one of the important funding options in the investment recovery mechanism.

Forecast

We raise our FY24-26 earnings projections by 1-6% after factoring in new PSC and tariff structure.

Valuation

We reiterate our positive view on the new operating agreement, which will reduce future earnings risk considerably. In view of this, we lower the market risk premium to 7.0% (from 8.6% previously) and derive a new DCF-valuation of RM9.94/share (vs RM9.18 previously). Maintain Hold

Source: TA Research - 21 Mar 2024