This article first appeared in The Edge Malaysia Weekly on February 13, 2023 - February 19, 2023

THE government’s recent announcement that jet aircraft would be allowed to fly out of Sultan Abdul Aziz Shah Airport in Subang, Selangor (Subang airport), under Malaysia Airports Holdings Bhd’s (MAHB) Subang Airport Regeneration plan excited many in the aviation community, though not so among analysts.

CGS-CIMB Research aviation analyst Raymond Yap thinks the positive impact on MAHB will be negligible.

In a research note last Friday, he says this is due to the possible cannibalisation of Kuala Lumpur International Airport (KLIA) and klia2 traffic.

“[There will be] capital expenditure (capex) required to reactivate the Subang terminals [to accommodate narrow-body jet aircraft flights for up to eight million passengers per year] and the likely very minimal incremental air passenger traffic to MAHB as ticket prices may be more expensive than at KLIA/klia2 as airlines may seek to charge travellers who live in the vicinity higher fares for the convenience of flying out of Subang, and to recoup the cost of establishing a new base at Subang, including ground crew, ticketing staff and the cost of renting office/counter space,” Yap notes.

Analysts like Yap are instead more positive on the Ministry of Transport’s (MoT) announcement last Thursday on the new operating agreements (OAs) that MAHB will sign with the government to operate, manage, maintain and develop 39 airports and short take-off and landing (STOL) airports until 2069 (OA 2023), which are expected to be finalised and signed by end-March. MAHB has two OAs with the government — one for the airport operator to manage KLIA and klia2, and another for other airports in Malaysia.

“The most important provision of OA 2023 is that MAHB may be able to explicitly recover any capex for airport development, on top of the usual opex (operating expenditure), by way of a ‘suitable investment recovery mechanism’. This may include a regulatory asset base (RAB) model, based on a to-be-determined weighted average cost of capital (WACC) rate of return against MAHB’s asset base,” says Yap.

He adds that OA 2023 will allow MAHB to derive a rate of return on its capex spending, which was previously not possible under the current OAs that were signed in February 2009 (OA 2009). “This may involve an increase in its aeronautical tariffs to pay for the capex over a period of time. However, the details are still unknown as the Malaysian Aviation Commission (Mavcom) is still working out a framework for investment recovery and the WACC is to be calculated only when a project will be implemented, according to MoT.”

Yap also points out that MAHB will no longer have to bear the full burden of development capex for the airports it manages in the country as it can tap the proposed Airport Development Fund (ADF), which will receive contributions from airport users, including public and airline operators.

Kenanga Research analyst Raymond Choo Ping Khoon says a lightened burden on a massive capex, particularly for airport expansion and maintenance, is positive for MAHB.

However, he warned that the opening up of the industry could mean MAHB will face competition from new operators that are likely to be set up via a public-private partnership (PPP) model. There is a strong belief that the PPP model could hasten the development and expansion of airports nationwide, he adds.

One of the new material terms under OA 2023 stipulates that the government has the right to restructure the airport industry through “clustering, carving out, divestment of airports, closure of existing airports or terminals or the restructuring of the ownership of any of the facilities subject to mutual agreement with MAHB”.

Choo likes MAHB’s stock for it being the dominant airport operator in Malaysia and one of the largest in Turkey, being a good proxy for the recovery of air travel and tourism, and its strong shareholders who have demonstrated unwavering support through thick and thin (including during the Covid-19 pandemic and a massive cash call in 2014).

“However, a recent proposal to keep airport tariffs status quo could work against MAHB’s ability to generate enough cash flow for capex purposes, particularly for airport expansion and maintenance. While Mavcom also proposes a mechanism for MAHB to recoup losses incurred during Regulatory Period 1 (RP1) (2023-2025) in RP2 (2026-2028), we are concerned over MAHB’s cash flow over RP1. While the proposals in the Mavcom consultation paper are not cast in stone, they do significantly raise MAHB’s earnings risk over the medium term,” he says in a report last Friday.

Ten of the 19 analysts tracked by Bloomberg rate MAHB a “hold” and nine a “buy” while none advise selling the stock, with an average target price of RM7.46.

While MIDF Research favours MAHB as one of the major beneficiaries of the strong air traffic recovery, it has recently downgraded the stock to “neutral” as its share price has rallied on news of China’s reopening. “We believe that the positives have been largely priced in.”

In a Feb 8 report, Maybank Investment Bank aviation analyst Samuel Yin Shao Yang expects MAHB to break even in the fourth quarter ended Dec 31, 2022 (4QFY2022) after a difficult 2½ years, and believes it is set for profitability going forward.

MAHB slipped into the red for the first time in the financial year ended Dec 31, 2020 (FY2020), as air travel came to a near standstill due to Covid-19-related travel restrictions. The group posted a net loss of RM1.12 billion in contrast to a net profit of RM537 million the year before, as revenue fell 64% year on year (y-o-y) to RM1.87 billion.

MAHB reported a smaller net loss of RM171.94 million on revenue of RM2.12 billion in 9MFY2022.

Analysts are expecting MAHB’s full-year net loss to further narrow to RM183.6 million in FY2022, before recovering to post a net profit of RM365.8 million for FY2023, according to estimates compiled by Bloomberg.

On MAHB’s performance for FY2022, MAHB managing director Datuk Iskandar Mizal Mahmood says, “Things are looking good. We are now focused towards gearing up our operations further, elevating ourselves. We are looking forward to stepping up our operations, doing some changes like our aerotrains and baggage handling system. The aerotrain project is on track, but will be ready in two years. The [upgrade of the] baggage handling system will take about three to four years [to complete],” he tells The Edge.

He also says the airport operator is continuing to keep a close eye on the developing situation in Turkey, following the recent earthquake, and assured that operations are normal at the MAHB-owned Istanbul Sabiha Gokcen International Airport (SGIA).

“We have seen several incidents, be it security setbacks or natural occurrences, over the last 10 years since we have been operating there. For us, Turkey is a resilient market. It (SGIA) is one of the fastest growing airports,” Iskandar Mizal says, adding that SGIA was profitable in FY2019 for the first time but then Covid-19 hit.

AmInvestment Bank analyst Lucas Tan Jun Sian notes that SGIA was mostly unaffected by the recent earthquakes in southeastern Turkey, which are located 1,080km away from the airport.

Buoyed by higher passenger traffic of 31.2 million passengers (up 23% y-o-y) in FY2022, reaching 87% of the 2019 level, he is expecting passenger throughput at SGIA to increase by 6% y-o-y to 33 million in FY2023 (101% of 2019 level) and 9.5% to 36.2 million in FY2024 (110% of 2019 level).

Shares of MAHB are up 7.61% so far this year, but further details on how the new terms of OA 2023 would affect future passenger service charge and user fee calculations could be a catalyst to watch. Its shares closed at RM7.07 last Friday, translating into a market capitalisation of RM11.73 billion.

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