This article first appeared in The Edge Financial Daily on June 20, 2019

KUALA LUMPUR: Malaysia Airports Holdings Bhd (MAHB) was the biggest gainer on Bursa Malaysia yesterday, up 58 sen or 7.3% higher to close at an eight-month high of RM8.51.

The stock has climbed by 28.7% from its lowest point this year at RM6.61 on April 11. It had risen to an intra-day high of RM8.66 earlier yesterday before paring gains.

The rally, which came a day after the Malaysia Aviation Commission (Mavcom) published a consultation paper on the aeronautical charges framework, raises the question of whether there is further upside for the counter.

According to Bloomberg consensus, there are 16 “buy” calls on MAHB, four “hold” calls, and one “sell” call, with analysts’ target prices (TP) ranging from RM7.80 to RM10.50.

Out of the 18 TPs shown on Bloomberg, only four were below MAHB’s closing price of RM8.51, while the remaining 14 were fixed above it.

Mavcom’s consultation paper shed more light on MAHB’s Regulatory Asset Base (RAB) framework, which includes nominal pre-tax weighted average cost of capital (WACC) of 10.88%, new transfer passenger service charges (PSC) and three options of PSC model proposed by the airport operator.

RHB Research analyst Alan Lim pointed out that the proposed WACC rate is at the higher end of the 9-11% range.

“Although the proposed regulated WACC of 10.88% is lower than MAHB’s suggestion of 12.7-14%, it is at the higher end of Mavcom’s initial range of 9-11% in the first consultation paper. Note that the WACC represents the fair return on capital for the amount of capex that MAHB will spend — as such, the higher value is better for MAHB,” he said.

Lim said his firm is positive on Mavcom’s proposals as it removed a large amount of uncertainty for the RAB framework.

“We expect MAHB’s valuation to rerate further. Recently, MAHB also delivered a positive earnings surprise for first quarter of financial year 2019 (1QFY19). We note the ongoing concerns over the impact of the departure levy, court cases with AirAsia and AirAsia X, as well as Turkish lira depreciation costs — this has been factored into our target price, which conservatively implies -1.2 standard deviation versus its mean,” he noted.

Lim has a “buy” call on MAHB, and increased his TP to RM9.20 in his note yesterday.

In his research note yesterday, MIDF Research analyst Adam Mohamed Rahim said the new transfer PSC of RM3 for domestic passenger and RM17 for international passenger, could give MAHB an additional RM2.2 million revenue.

“Although RM2.2 million only makes up less than 5% of MAHB’s PSC revenue in FY18, we opine that this additional source of PSC revenue could buffer any potential downside risks from a lower-than-expected return from the RAB framework,” he said.

Adam reiterated a “buy” call on MAHB yesterday, with an unchanged TP of RM8.80.

Meanwhile, Kenanga Research analyst Adrian Ng, in his note yesterday, also viewed the consultation paper a positive development for MAHB’s RAB framework.

Apart from the rate of return, Ng also like the proposed three-year cycle for the first regulatory period (RP1) as the shorter period allows both MAHB and Mavcom to fine tune aeronautical charges in RP2 should there be any huge variation on capex allocation and traffic forecasts.

Additionally, Ng said the requirement for Mavcom’s approval on MAHB’s capital expenditure provides check and balance element in safe guarding stakeholders’ interest.

“We are excited with the proposed implementation RAB under the purview of Mavcom as it promotes better transparency in aeronautical charges.

“While the second consultation paper is non-conclusive at this juncture, we believe that it is positive for MAHB should they be able to execute the approved capex (capital expenditure) plan of RM5 billion under RP1 upon implementation of RAB based on WACC of 10.88%, which we would look to upgrade our estimated FY20 earnings [for MAHB] given the potential return on assets is higher than our current estimates,” he said.

Ng maintained his “outperform” call on MAHB, with an unchanged TP of RM8.70.