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This article first appeared in The Edge Financial Daily on December 11, 2019

Malaysia Airports Holdings Bhd
(Dec 10, RM8.06)
Maintain hold with an unchanged target price (TP) of RM9:
With the passing of time, the regulatory asset base (RAB) method’s likelihood of commencing on the targeted Jan 1, 2020 is reduced. Ideally, the aviation industry needs a lead time of one to two months to implement any new charges. Malaysia Airports Holdings Bhd (MAHB) will continue its current operating agreement with the government. We retain our earnings forecasts and TP of RM9 based on 8.6 times estimated financial year 2020 enterprise value over earnings before interest, taxes, depreciation and amortisation — one standard deviation below the mean, as it is premised on the existing operating agreement.

The Malaysian Aviation Commission (Mavcom) had a meeting with sell-side analysts on Oct 31 and it iterated Mavcom is sticking to its commitment to starting the new aeronautical charge framework on Jan 1, 2020. It stated explicitly that an announcement is forthcoming shortly. However, nothing has come to pass since, and we believe a delay in starting the RAB method is inevitable.

MAHB has many airports to expand and facilities to upgrade. Some projects such as the Penang Airport and Kuala Lumpur International Airport (KLIA) baggage handling system are due to start shortly. Given the RAB starting date uncertainty and the allowable rate of return, we think the starting dates of these projects could be pushed later. MAHB will seek funding from the capital market and the regulatory rate of return is a pivotal variable to determine the loan’s pricing.

The operating agreement is currently favourable to MAHB because of its high utilisation, which we estimate to be approximately 90%. Based on our estimate, for every incremental revenue, a 50% translates into the bottom line. This will increase in tandem with the utilisation rate, therefore MAHB is enjoying a high cash-flow cycle. Despite this, we believe MAHB’s share price will stay sideways as the market is apprehensive about regulatory uncertainties. — Maybank IB Research, Dec 10

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