MAHB may face expansion risk over the next 12 months

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: Malaysia Airports Holdings Bhd's exposure to expansion risks could escalate over the next 12 month as it could take on a greater role in future airport expansion, Moody’s Investors Service says.

It said on Wednesday that MAHB's (A3 stable) role could see potential changes as it would be responsible for developing new airport capacity under a new concession agreement.

Another factor was a new tariff-setting framework that would determine its capacity to fund future expansion, it said.

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. 

MAHB operates 39 airports in Malaysia — including Kuala Lumpur International Airport, the country's international gateway airport —under two concession agreements executed in 2009.

To recap, Moody's said an extension of MAHB's concession agreements was announced in April 2019 although final terms and conditions were still being negotiated. 

Moody's pointed out a key consideration in the negotiation is a potential increase in MAHB's role in future expansion, in which case MAHB would face similar expansion risk and the associated funding requirements as its rated APAC peers.

“Although such a change would increase MAHB's exposure to expansion-related risks, such an arrangement would give MAHB more control over the planning and timing of expansion, which would support the airport group's ability to maintain its quality of service and competitiveness with other hub airports in the region.

“Operationally, the pressure on MAHB's existing infrastructure is not as acute as those faced by rated Indian airports but additional investment will likely be required over the next three to five years. 

“At the end of 2018, a number of MAHB's airports in Malaysia were already operating at above or close to capacity, including KLIA Main (Terminal 1),” it said.

Moody's emphasised that improving efficiency and service quality were crucial to KLIA's ability to compete as a hub airport for international traffic originating in the region.
 
MAHB has proposed a capital spending programme of around RM5bil for its Malaysian operations in the first control period between 2020 and 2022, as part of its regulatory submission for the new tariff setting framework. 

The proposed amount is broadly in line with the RM5bil proposed by the regulator in the consultation paper published in June 2019, and which would represent a significant increase from the RM200mil to RM300mil spent annually between 2014 and 2017.

Moody's also pointed out there was some uncertainty remains over the new tariff-setting framework.

Using a hypothetical funding ratio of 70%, the airport will require additional debt of around RM3.5bil, higher than MAHB's net debt of RM2.3bil at end-2018. 

“As such, the ability to grow in revenue and cash flow provided under the tariff-setting framework will be important to the airport group’s ability to preserve its financial profile during the expansion period.

“MAHB’s financial leverage is well positioned for its rating (as of the end of 2018) with some headroom to absorb additional expansion related debt. 

“However, the airport group’s ability to fund future expansion projects and preserve its financial metrics will hinge on the new tariff-setting framework being developed by its independent regulator, the Malaysian Aviation Commission (Mavcom),” it said.
 
Based on a consultation paper published by Mavcom in June 2019, a new building-block based framework — if implemented as is— will likely keep MAHB's aeronautical revenue from its operations in Malaysia close to or above the prevailing level. 

“We believe the additional disclosure in Mavcom’s latest report has reduced MAHB's downside revenue risk upon implementation of the framework in 2020, which had negatively affected the airport's credit profile in the past.

“Implementation of the new tariff framework should also have a positive impact on MAHB's ability to grow revenue to meet expansion funding requirements. This is because it provides a clearer link between revenue and capital investment than the current arrangement under which tariffs are set without a published methodology,” it said.