CIMB Research upgrades Malaysia Airports to Add

So far, the rating agency said MAHB had not been directly exposed to expansion-related risk because the Malaysian government retains the primary responsibility of developing new airport capacity.

KUALA LUMPUR: CIMB Equities Research has upgraded Malaysia Airports Holdings Bhd (MAHB) to Add, with a slightly higher sum-of-parts based target price of RM9.80, as it believes the 8% share price sell-off on Monday was on unwarranted fears.

It said on Thursday the market was worried that the government will “crowd out” MAHB in airport capex funding and hurt passenger traffic by imposing a new aviation levy.

“Both these concerns are overblown, in our view, and we see the current share price as an attractive entry point,” it said.

To recap, the government had during the Budget 2019 announcement, said it would set up an airport REIT to securitise the flow of user fee receipts (akin to concession fees), which it receives as a share of MAHB’s Malaysian revenues and sell 30% of the REIT to raise fiscal monies. 

This proposal has no economic impact on MAHB, except that MAHB may have to pay user fees to the REIT, rather than the government, in the future.

The government noted that it may sell additional units in the REIT to fund future airport capex investments. 

“Investors appear to have taken this badly, in our view, fearing that the government will reduce MAHB’s opportunities to invest in capex, which would lead to fewer opportunities to earn more profits under the Regulatory Asset Base (RAB) framework that is scheduled to be implemented on July 1, 2019.

“However, we believe that these concerns are unwarranted since the government has made clear many times that it will prefer the private sector to undertake capex spending on airport infrastructure,” it said.

Hence, CIMB Research views the Budget 2019 statement on government capex spending on airport upgrades as merely a back-up plan in the event that no private player is willing or able to upgrade airport infrastructure in smaller towns.

“Separately, we believe the new aviation levy to be imposed by the government from June 1, 2019 onwards will be negative for airlines, especially as the increase in the cost of travel may affect demand for flights and may cause airlines to rationalise capacity, which will ultimately be bad for passenger traffic growth, in our view. 

“Our view is that this risk is also substantially mitigated by the coming implementation of the RAB framework, which will simply raise the aeronautical tariffs on a per pax basis, and which we believe will leave MAHB with the same level of profits.

“The only minor risk, in our view, is that MAHB may overestimate passenger traffic for the first regulatory period of 2020-22F, leading to an under-recovery of operating costs and capital costs until the next regulatory period begins in 2023F. On the basis of this minor risk, we have cut our FY18-20F core EPS forecasts by 4%-6%,” CIMB Research said.