This article first appeared in The Edge Financial Daily on August 7, 2019
Malaysia Airports Holdings Bhd
(Aug 6, RM8.46)
Maintain buy with an unchanged target price of RM9.43: The government has gazetted the departure levy which will take effect on Sept 1, 2019. The rates gazetted differ from what was initially proposed during Budget 2019 whereby there was no classification between economy and premium class passengers. Passengers flying in the premium class will have to pay a departure levy more than six times than the economy class. In other words, premium class passengers will subsidise economy class passengers given their assumed higher purchasing power.
Exemptions for the departure levy have also been laid out by the government.
The groups exempted from paying the departure levy are: i) infants of the age of below 24 months; ii) the crew on duty on board an aircraft; and iii) transit passengers not exceeding a 12-hour time frame.
The government has not yet given details of how the departure levy will be collected. In our view, there are two possible scenarios for how the departure levy is collected. The first scenario is that the international departure levy would be collected at airports for passengers who purchased flight tickets prior to the levy implementation date.
Meanwhile, tickets bought post-implementation date will already have the levy priced into the airfares.
Another scenario would be an exemption for passengers leaving on or after the implementation date using an air ticket issued or purchased before that date. The latter scenario has already been adopted by Japan for its ¥1,000 departure tax effective on Jan 7, 2019. Therefore, we strongly believe the latter would be taken into consideration by the government for the implementation of the departure levy.
In comparison with other countries such as Hong Kong, Bangkok and Australia, Malaysia still has the lowest departure levy for economy class passengers (for both Asean and non-Asean destinations) and premium class passengers (for Asean destinations). Meanwhile, we would like to note that the levy for premium class passengers flying to non-Asean countries is only lower than what is charged in Australia.
Based on our analysis, the percentage of the departure levy charged to the total flight ticket price is rather insignificant. For instance, for full-service carriers such as Malaysia Airlines, the departure levy makes up around 1.1% and 2.5% on average of the flight ticket price for economy class and business class passengers respectively. The portion of the departure levy to the total ticket price would be smaller for further destinations such as Europe and North America. As for low-cost carriers such as AirAsia, the percentage of the departure levy to the total ticket price is still immaterial at 1.5% on average for normal fares. Although the percentage is slightly higher at 3.7% for premium flatbed passengers, it is important to note that seats for this class constitute less than 5% of total seats offered for sale.
According to a study done by the International Air Transport Association, the departure levy would reduce the number of international air passengers departing from Malaysia. This would decrease the aviation sector’s gross domestic product growth contribution by up to RM1.7 billion. Notwithstanding this, the impact on Malaysia Airports Holdings Bhd’s (MAHB) passenger service charge collection would decline by roughly RM46.7 million, which is only less than 1% of MAHB’s revenue estimates for financial year 2019 (FY19) and FY20.
Our analysis assumes that 47% of international passengers depart for Asean destinations, while the remainder departs for destinations beyond Asean. As such, we have made no adjustments based on the international departure levy to our earnings estimates for FY19 and FY20.
Overall, we continue to believe the departure levy will not be a dampener on passenger traffic growth. This is premised on our latest findings, in addition to our previous analysis highlighted in a report on April 15, 2019. Therefore, we believe MAHB will be able to maintain its upward trajectory, especially in terms of passenger growth. This is amid the relaxation of visa policies for Chinese and Indian nationals visiting Malaysia, which we opine may be extended to the following year in conjunction with Visit Malaysia Year 2020.
Hence, we reiterate our optimism that MAHB passenger numbers will surpass the 100 million mark in 2019 while maintaining a relatively conservative growth rate of 3.5% to 102.5 million. As such, we opine that the recent selldown of MAHB shares was unjustified and presents an opportunity for investors to accumulate. — MIDF Research, Aug 5