CIMB Research retains Add for Malaysia Airports, TP RM9.47

KUALA LUMPUR: CIMB Equities Research expects MALAYSIA AIRPORTS HOLDINGS BHD (MAHB) to deliver strong earnings growth in FY20F due to upcoming regulatory changes, such as the Regulatory Asset Base (RAB) framework.

It said on Thursday it was retaining its Add for MAHB and target price of RM9.47, which was 28% above the last traded price of RM7.40.

CIMB Research said MSCI will be increasing the weighting of China A shares into its indices progressively in May, August and November 2019, resulting in a potential reduction of Malaysia’s weighting. 

As MAHB is a member of certain MSCI indices, its share price may see some periodic selloffs from May until November 2019. 

“In our view, any sell-off is a good chance for investors to accumulate,” it said. 

The research house also pointed out that on April 12, MAHB announced the Cabinet had approved the extension of MAHB’s concession to operate 39 airports in Malaysia from 2034 to 2069. 

While this merely confirms an earlier decision by the previous government, it was a major relief as the present government had considered dismantling MAHB’s airport monopoly. 

MAHB expects to sign the new Operating Agreement (OA) with the government by June 2019, upon which we expect the user fee payments to the government to initially decline, and then no longer increase at a rate faster than revenue, as is the case currently.

“ Also, while four new geographical airport clusters have been established to facilitate the entry of new, third-party private investors and financiers of airport development capex, we believe MAHB will continue to have the ‘right of first refusal’ on any airport capex,” it said. 

CIMB Research also noted that the Malaysian Aviation Commission (MAVCOM) will likely announce decisions on the inputs to the RAB model for aero tariff determination by June, begin a shadow period from July, finalise the inputs by October, and begin official implementation by Jan 1, 2020. 

In its Oct 2018 paper, MAVCOM considered using a real WACC of 7% (nominal WACC of 10%), resulting in a 16% rise in aero tariffs based on RM4bil of airport capex over the first 3-year RAB cycle. 
MAHB is trying to convince MAVCOM to give it more time to raise gearing levels, and to consider applying a higher WACC in the first cycle. 

Also, while MAVCOM had proposed a price cap, MAHB is asking for an aero revenue floor to be in place, to protect it from black-swan events. 

“Eventual introduction of dual-till RAB to drive earnings further  The introduction of dual-till RAB is at the earliest from Jan 1, 2023 (the start of the second RAB cycle), or from the third RAB cycle beginning Jan 1, 2026 as we assume. As the non-aero business wriggles free from regulatory constraints on ROIC, required aero tariffs should rise further, helping make MAHB’s Malaysia business even more profitable,” CIMB Research said.

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