This article first appeared in The Edge Financial Daily on October 25, 2018

Malaysia Airports Holdings Bhd
(Oct 24, RM8.29)
Maintain buy with an unchanged target price (TP) of RM9.88: The Malaysian Aviation Commission (Mavcom) released a consultation paper laying out draft proposals for the level of aeronautical charges expected in 2019. The crux of the draft proposal is the Regulated Asset Base (RAB) framework, which provides a direct link between capital investment and the level of charges. The framework also emphasises a “user-pay principle” instead of burdening taxpayers, some of whom may not be air travellers.

Mavcom will first assess the business plan and capital investment submitted by Malaysia Airports Holdings Bhd (MAHB) while considering components such as the regulated asset base, operating costs and non-regulated revenues. The required regulated revenue yield per passenger from passenger service charge (PSC), landing fees and parking charges will subsequently be calculated. In essence, the RAB is premised on assets used for the provision of aeronautical-related services that include commercial activities under a single till regime. Meanwhile, assets for ancillary operations and those held overseas are excluded from the RAB.

Currently, tariffs are standardised for all airports in Malaysia. With a RAB framework in place, an airport operator can determine the structure and charges as long as they meet the cap designated by Mavcom. Therefore, there is an option for airport operators to set tariffs at a national level or via groupings based on size or level of facilities and services or geographic locations.

To control charges moving forward from mid-2019 to 2022, Mavcom has considered the price control mechanism over the revenue control and hybrid control. The price control has the advantage of being simple to understand and the traffic forecasts should be the responsibility of airport operators such as MAHB to manage.

We view that the proposed RAB framework as positive as it will elevate the level of transparency on aeronautical charges and accountability of airport operators. It will also ensure that MAHB will be remunerated for the development of its assets. Based on preliminary analysis, we estimated that MAHB have undercharged its PSC, landing and parking fees previously. This is based on comparing the historical financial year 2017 (FY17) financials, on an actual basis and the price cap should the RAB be implemented in FY17. Furthermore, MAHB would have to undergo an institutionalised consultation process for capital expenditure planning, requiring inputs from all stakeholders. As such, a push for efficiency exists as only efficient costs would be considered under the RAB framework.

We make no changes to our earnings forecasts for now as the RAB is at proposal stage.

Although we are positive on the RAB framework, it is still in progress. Hence, we premise our “buy” call on the expectation of continuing strong tourist arrivals. The expected headwinds from rising fuel prices will be muted as MAHB has minimal exposure to changes in fuel price. — MIDF Research, Oct 24