Approval in-principle of new Operating Agreement terms positive for MAHB

Published on 15 Feb 2023.

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The Malaysian Government’s approval in-principle of the new material terms for the Operating Agreements (OA 2023) between the Government and Malaysia Airports Holdings Berhad’s (MAHB or the Group) is viewed as a positive development. The new OA 2023 provides MAHB an option to invest in viable airport developments at a set investment return while a compensation mechanism similar to the existing marginal cost of support charges (MARCS) mechanism is expected to be retained.

Announced on 9 February 2023, OA 2023 is slated for signing in March 2023, for MAHB to operate, manage, maintain and develop 39 airports and short take-off and landing airports across the country until 2069. Based on the material terms disclosed so far, OA 2023 will provide clarity on the funding of airport development, which could stem from Government allocations through Development Expenditure or MAHB through a suitable investment recovery model mechanism. This provides MAHB an option to invest in any viable airports, should it choose to, and achieve a reasonable rate of return (with a mutually agreed project weighted average cost of capital to be determined upon project implementation). Under the previous OA, airport development was mostly under the purview of the Government. 

OA 2023 also includes the establishment of the Airport Development Fund (ADF) to receive contributions from airport users, the public and also airlines and does not involve contributions from Government funds. Under this arrangement, 50% of the Passenger Service Charge (PSC) component that is taken into account in the calculation of the User Fee will be channelled to the ADF trust account. The percentage of PSC or percentage of other components in the User Fee to be contributed to the ADF account will be reviewed every three years. The establishment of the ADF will allow MAHB to use its capital more efficiently in other areas of its operations.

With OA 2023 being an affirmation of the airport network framework and cross subsidisation model but with additional terms as guided by the Government’s announcement, we expect the compensation mechanism similar to the existing MARCS mechanism to be retained. Under the MARCS mechanism, MAHB receives restitution from the Government when the actual tariffs fall below the benchmark rates – a key feature of the previous OA and an important rating consideration as MAHB need not absorb the revenue loss when actual tariffs fall below the benchmark rate.

Under OA 2023, the Government has the right to restructure the airport industry through clustering, carving out, divestment of airports, closure of existing airports or the restructuring of the ownership of any facilities. While this may potentially see new competition via new operators, we see the threat to MAHB as manageable at this juncture given its extensive experience and track record. As our base case did not factor in potential new players, we will reassess the impact if this materialises. This clause is subject to mutual agreement with MAHB. Overall, we see the near-term credit implications to be neutral for MAHB, although positive for the industry from perspective of realising the potential of the different domestic airports.

Meanwhile, the Government’s announcement of the regeneration of Subang airport to be led by MAHB on 6 February 2023 removes uncertainty given past reported takeover attempt of Subang airport. Nonetheless, we have not factored in any redevelopment costs into our forecast; further developments and details on this front will be monitored and MAHB’s credit metrics reassessed. 

On another note, MAHB-operated airport in Turkiye, the Sabiha Gokcen International Airport (SGIA), is not directly affected by the recent Turkish earthquake. SGIA performed relatively well during the pandemic, recovering quicker than MAHB’s Malaysian airports due to more relaxed travel curbs. In 2022, SGIA welcomed 31 mil passengers (87% of 2019 level) – performing better than our expectations. SGIA accounted for a substantial 84% of MAHB’s operating profit before depreciation, interest and tax (OPBDIT) in 9M FY Dec 2022 as recovery in its Malaysian airports is still lagging those of SGIA but is expected to contribute about 30% of the Group’s OPBDIT this year with the gradual recovery of its domestic airports (2019: 27%). We are not revising our expectations for 2023 at this juncture.

MAHB’s ratings (as listed below) were last reaffirmed on 27 October 2022. 

Table 1: MAHB’s ratings

Notes:

1. The ratings of MAHB’s RM2.5 bil and RM5.0 bil Senior Sukuk Programmes reflect the Group’s credit profile.
   The instrument ranks pari passu with the Group’s senior unsecured borrowings.
2. MAHB’s RM2.5 bil and RM5.0 bil Perpetual Subordinated Sukuk Programmes are rated two notches below its long-term
   corporate credit rating to reflect the risk of deferrable profit distributions and the deeply subordinated rights of the sukukholders
   to claims in the event of insolvency.
3. The rating of MAHB’s RM3.1 bil Islamic MTN Programme (under Malaysia Airports Capital Berhad) is linked to the Group’s
   senior rating as the Islamic structure of the facility provides recourse to MAHB by virtue of its obligations under a purchase undertaking.

 

Analytical contacts
Karin Koh, CFA 
(603) 3385 2508
karin@ram.com.my

Thong Mun Wai 
(603) 3385 2522
munwai@ram.com.my

 

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