SHARES in Malaysia Airports Holdings Bhd (MAHB) have gained some traction since last month amid a renewed buzz over a hike in passenger service charges (PSC) at the 39 airports it manages in Malaysia.

While the consensus among analysts is that a PSC hike will lead to an immediate boost in MAHB’s top line and bottom line, some say the revenue accrual may be lower than expected under the purported new PSC structure. Still, they will rerate should the catalyst crystallise.

A check on Bloomberg shows that MAHB has a consensus target price of RM6.88, giving it a potential upside of 3.5% to its closing price of RM6.63 last Thursday. Seven research houses have a “buy” recommendation, five have a “sell” and seven have a “hold” call on the stock.

MAHB’s share price has had a volatile ride since the beginning of 2014. It was a bit of an aviation darling until the twin tragedies of flights MH370 and MH17 took the wind out of the sector. The stock has fallen 17%, from RM8.02 on Jan 3, 2014 although year to date, the stock has pared its losses and is up 20% from RM5.54 on Dec 31, 2015. It has been trading in a 52-week price range of between RM5.05 and RM7.30.

As a company, MAHB has also been busy over the last few years, with the launch of the RM4 billion klia2 in 2014 and the full takeover of Turkey’s Istanbul Sabiha Gokcen Airport (ISGA) last year.

The airport operator has grown revenue by more than 40%, from RM2.75 billion in the financial year ended Dec 31, 2011 (FY2011), to RM3.87 billion in FY2015. Its net profit has risen at a faster pace , growing 65% from RM401.12 million in FY2011 to a peak of RM663.37 million in FY2014.

However, the cost of these fixed assets and high debt levels are giving rise to concerns that they could take a bite out of MAHB’s earnings in the form of depreciation and interest expense going forward. This comes at a time when it is grappling with a weak global economy.

As such, the impending PSC hike will give a much-needed boost to the airport operator’s earnings, which will help offset the large amortisation and depreciation costs.

In FY2015, the amount MAHB chose to write off more than doubled to RM901.71 million from RM405.4 million in FY2014. This large sum for depreciation hurt its net profit, which fell by 94% to RM40.1 million in FY2015 from RM663.37 million the previous year. The earnings plunge was also magnified by the absence of exceptional gains (comprising gain arising from adjustment of fair value of investment, gain on bargain purchase and impairment of goodwill) which lifted its FY2014 bottom line by RM567.3 million.

According to MAHB, more than half, or RM502.8 million, of the depreciation and amortisation expense for FY2015 was derived from its Malaysian operations and the remaining RM398.9 million from its Turkish operations.

“The additional RM97.4 million from the Malaysian operation in FY2015 as compared to FY2014 was mainly due to the full-year amortisation of klia2 asset since its opening in May 2014,” MAHB tells The Edge in an email reply.

The group’s earnings growth for FY2015 was also negated by a 390% increase in interest expense to RM741.24 million from RM151.34 million in FY2014, mainly driven by the consolidation of ISGA’s financing cost of RM473.6 million, the RM59.2 million premium on debentures arising from the disposal of MAHB’s minority stake in Delhi International Airport, as well as borrowings related to the construction of klia2.

In the first half ended June 30, 2016 (1HFY2016), MAHB continued to see an increase in its depreciation and amortisation charges by 21% to RM500.51 million, from RM412.68 million a year ago.

Fortunately, finance cost fell 13.1% to RM323.3 million in 1HFY2016 from RM372 million in 1HFY2015. Of the total, RM92.9 million came from its Malaysian operations and RM230.5 million from its Turkish operations. The reduction is also partly due to lower foreign currency loss in 1HFY2016 and ISGA’s repayment of the senior term facility by RM44.8 million.

As at June 30, 2016, its cash balance stood at RM915.45 million, while its short-term and long-term borrowings totalled RM5.76 billion.

Will depreciation and amortisation charges continue to swell?

For now, there are preliminary signs that depreciation and amortisation charges, which were similar at RM249.64 million and RM250.87 million in the first quarter and second quarter of FY2016 respectively, could have already stabilised. Still, a slower-than-expected passenger growth rate vis-a-vis the forecasts may force the group to revisit its current assumptions.

That’s because MAHB’s amortisation policy is not based on the straight line method, but is determined on the unit of production (UOP) method, which reflects the asset’s usage based on passenger volume and usage of airport activities over the concession period.

Some fund managers have expressed concern over the low growth in passenger numbers, which may drag revenue and expose investors to risks during a downturn.

They are also concerned the group may pay lower dividends on lower net profit. However, it is worth noting that MAHB paid a dividend of 8.5 sen per share in FY2015, amounting to RM141.1 million against 5.6 sen per share in FY2014 totalling RM87 million.

In a Sept 14 report, MIDF Research notes that impressive growth numbers from Malaysian airports have been affected by declines in Turkey, dragging down overall growth for MAHB passenger traffic to 2% y-o-y in the first eight months of this year.

To this, MAHB says it is confident that its operations in Malaysia will continue to grow in tandem with the expected increase in passenger movement combined with aggressive controls over spending. It is maintaining its passenger traffic growth for Malaysia airports at 2.5% for 2016.

“MAHB takes its nation-building role seriously. We are committed to supporting government development plans, and are an active partner in a number of government initiatives,” MAHB tells The Edge.

It adds that the carrying amounts of its assets are reviewed at each reporting date to determine whether there is any indication of impairment. “If any such indication exists, the asset’s recoverable amount is estimated to determine the amount of impairment loss.”

So how long will this go on for?

An analyst with a local investment bank believes that depreciation and amortisation charges for FY2016 are likely to remain high, and projects that they will come to about RM950 million due to a combination of ISGA and klia2.

“But we expect MAHB’s FY2016 earnings to rebound y-o-y as airports mature with a higher utilisation rate, [albeit they will] remain low, dragged by depreciation,” the analyst says.

“High operating leverage in MAHB will amplify earnings growth. Depreciation will drag performance only if passenger numbers do not perform. Current numbers look palatable, save for ISGA which trended down due to terrorism concerns but it should normalise,” he remarks.

Still, the analyst points out that passenger numbers are projected on a long-term basis and thus, falling short by one year is unlikely to materially impact the calculation of depreciation. “Having said that, if there is substantial deviation, the auditors may require a revision in projection.”

For HLIB Research, it is projecting MAHB’s depreciation and amortisation charges to rise to RM921 million in FY2016 and RM931 million in FY2017, while interest expense is expected to stabilise at RM620 million and RM615 million in FY2016 and FY2017 respectively.

Despite the slower turnaround for ISGA, HLIB Research expects MAHB to post “exponential earnings growth” for FY2016 with the expectation of continued recovery in tourist arrivals, especially from China, as well as air travel demand from locals in 2H2016.

“MAHB also stands to benefit from a potential tariff increase in klia2 by 2017,” it says in a July 29 report, and expects MAHB to post a net profit of RM126 million in FY2016.

Meanwhile, Affin Hwang Capital Research, in a sector report dated Sept 23, comments that the PSC hike will lead to step-up increase in MAHB’s top line, but not all charges will flow to the bottom line due to the standing revenue-sharing agreement with the government in the range of 8% to 10%.

“Our back-of-envelope calculations shows MAHB’s FY2017E earnings could potentially more than double y-o-y, largely due to the low base effect and its high operating leverage,” it says.

“All things being considered, we believe the PSC hike is a reasonable and conscious decision by the authorities to standardise the charges across the airports. The hike is also in part to compensate MAHB as a fair investment return for the RM4.5 billion price tag for the construction of klia2, and to ensure quality upkeep of the airports,” Affin Hwang adds.

However, CIMB Research is of the view that the average PSC revenue accrual may fall by 2.6% under the purported new PSC structure compared with the current rates as a new “Asean” category is introduced.

In a Sept 22 note, CIMB Research goes on to explain that if the reported PSC materialises, domestic passengers will only have to pay RM5 more (to RM11 from RM6) and Asean travellers only RM3 more (to RM35 from RM32) at klia2.

“We estimate that the average PSC revenue accrual will fall 2.6% to RM35.06, as the reduction in Asean PSC at the KL International Airport and other airports offsets the PSC hikes seen at klia2. This possible outcome would be a significant disappointment for us as we had incorporated higher average PSCs into our model,” it says. 

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