Pic taken from MAHB Facebook
KUALA LUMPUR: Malaysia Airports Holdings Bhd
's solid operating results for 2017 will enable the company to manage the uncertainty associated with the new regulatory framework being considered by the Malaysian Aviation Commission (Mavcom).
Moody's Investors Service said the operating results of MAHB (A3 stable) reflected its improved financial position and would provide it additional flexibility to manage the uncertainty.
Moody's vice president and senior analyst, project and infrastructure finance, Spencer Ng said MAHB’s 2017 revenue increased by 11.5% compared with the previous year to RM4.65bil.
Passenger traffic grew strongly across its Malaysian airports and its unit Sabiha Gokcen International Airport (SGIA) in Istanbul, Turkey (Ba1 negative), leading to a 9.3% increase in aeronautical revenue.
“Higher revenue and a modest reduction in reported debt resulted in an improvement in the airport’s financial leverage at the end of 2017.
“Assuming no material change in the SGIA's utilization fee liability and MAHB's concession-related liabilities (both key adjustment items), we estimate the airport’s financial leverage, represented by funds from operations (FFO)/debt ratio, at around 10.2%, compared with the minimum tolerance level of 7%-8%,” he said.
Ng said over the next 12 to 24 months, we expect the company's financial leverage to remain around 11%-12%, supported by a mid-single-digit increase in passenger numbers, which will offset the incremental debt incurred to fund capital spending.
The increase in passenger traffic will be supported by favorable trends in tourism in Malaysia.
“Over next two to three years, we believe a key driver of MAHB’s credit profile will be Mavcom's final decision over the new tariff setting rules for airports in Malaysia,” he said.
In August 2017, Mavcom announced its plan to introduce a cost-based mechanism that would serve as the long-term methodology for setting aeronautical charges for commercial airports.
Established in March 2016, Mavcom is an independent economic regulator to the civil aviation industry in Malaysia.
Its responsibility includes the setting of aeronautical charges such as the passenger service charges, landing and parking fees.
According to a consultation paper published in February 2018, Mavcom outlined a number of options being considered for the new charge setting mechanism.
“We believe Mavcom’s decision over key inputs, such as the regulated asset base and the allowed return on capital invested, will ultimately determine the impact of the new rules on MAHB's revenue and cash flow.
“Moreover, a number of other regulatory parameters are also being considered, such as the adoption of a revenue cap or a tariff cap, and the use of a single-till versus dual-till revenue setting approach, could also affect the airport’s exposure to passenger volume and profitability in the future, after the new rules are implemented,” he said.
Given the range of parameters being considered, the credit impact from the new rules will remain unclear until more information is announced by the regulator.
Mavcom intends to publish its final framework in the second half of 2018, to be followed by a shadow testing period in 2019 and full implementation in 2020.
Our view of MAHB’s credit profile has not factored in any material adverse effects from the new rules, given the above-mentioned factors and the following considerations:
MAHB's revenue is governed by its operating agreements with the Ministry of Transport (MOT);
* the group’s strategic role in the Malaysia’s aviation industry; and
* the government’s track record in implementing generally supportive framework for other regulated industry, such as the power industry.
Under the Operating Agreement, MAHB is allowed to earn an agreed fixed benchmark return that is reset every five years.
Moreover, if Mavcom's new rules result in a reduction of in MAHB's aeronautical revenue than the fixed benchmark return, the MOT will compensate the airport for the shortfall through the Marginal Cost Support Sum mechanism, as long as the current agreement remains in place.
Signed in February 2009, the current agreement has a 25-year tenor that expires in 2034. In February 2017, the MOT announced a 35- year extension of the agreement, but key terms and conditions are being finalized and will be submitted to Cabinet for approval.
“We believe key provisions under the current agreement, such as the aforementioned benchmark return regime and government's responsibility to fund expansion capital expenditure, could be relaxed as part of the discussion.
“Given the uncertainty over the potential impact from the new rules, coupled with the on-going negotiation over the operating agreement, we believe it is important for the airport to maintain a buffer in its financial metrics to manage against any unexpected impact when the new framework and new operating agreement or both are introduced,” he said.
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