When Finance Minister Lim Guan Eng proposed an airport real estate investment trust (REIT) in his budget speech on Nov 2, the stock market did not take it well.
The following Monday when the market opened, airport operator Malaysia Airports Holdings Bhd (MAHB) saw its shares dive 99 sen or 12% to RM7.26 in early trade.
Lim’s proposal, f0r the first airport REIT in the world, caught many by surprise, including MAHB.
However, MAHB acting group CEO Raja Azmi Raja Nazuddin is taking it in his stride. He believes the more pertinent issue at hand is the finalisation of the operating agreement (OA) and regulated asset-based (RAB) framework before the airport REIT is put in place.
“This will probably happen after the finalisation of the RAB. We don’t have the full details and we will approach it after the RAB,” Raja Azmi tells FocusM.
He expects the RAB negotiations between MAHB and the Malaysian Aviation Commission (Mavcom) to be concluded sometime in the middle of next year.
According to Lim, the REIT exercise will only be carried out after the new RAB and user fees structure have been negotiated and finalised.
“Going forward, the REIT will have the opportunity to raise funds publicly either by issuing new REIT units or via borrowings in order to fund the improvement and expansion of airports, especially those facing over-capacity.
“This financial structure will significantly reduce the debt burden of the government to fund all of these projects on its own, while maintaining MAHB as an asset-light operator not bogged down by heavy capital investments and debt,” Lim had said, adding the government planned to raise RM4 bil by selling a 30% stake to private investing firms.
According to the minister, investors in the airport REIT will receive income arising from user fees collected from MAHB, which has the concession to operate the airports.
Analysts believe the proposed airport REIT may be neutral for MAHB in the near term but may not be an ideal way to raise funds for airport capital expenditure.
CIMB Research says there is no immediate impact on MAHB as the only change is in who gets the user fees from MAHB.
“It is important to note that the government’s proposed airport REIT will not benefit MAHB’s shareholders, but neither will it change the economic value of MAHB in any way,” CIMB adds.
According to Endau Analytics founder Shukor Yusof, a REIT is just one vehicle used to raise capital as part of a public-private partnership transaction and the impact on MAHB may not be in the immediate term.
“REITs are by definition sensitive to interest rates. It’s likely the US will hike rates again in the near future which will trigger rate rises elsewhere around the world.
“Let’s wait until Mavcom finalises the RAB but in general, it puts MAHB’s growth potential under scrutiny, not immediately but beyond say, five years. Has MAHB got solid fundamentals? We shall find out,” he adds.
On whether it is a good move to park airport assets under a REIT, Shukor says: “The world’s airports handle over three billion passengers each year. An airport REIT is potentially a way for investors to gain access to the airport infrastructure that has supported the growth of the industry, especially in the Asia- Pacific.
“The government says it has a trillion ringgit debt so this move, if successful, might pave the way for more private sector investments in public infrastructure.”
REIT may not serve its purpose
Some analysts reckon a REIT may not be able to serve its purpose to raise sufficient funds for airport expansion. RHB Research says REIT regulations limit investment in property development and assets under construction to 15% of a REIT’s total asset value.
“This restriction could potentially be a hurdle for the airport REIT to fund development capex for airports in the future,” it adds. The research house points out that the current user fee quantum may not be enough for the REIT.
“We understand that MAHB has consistently paid RM400 mil in user fees to the government. However, we believe this may not be enough for a REIT (based on a RM4 bil indicative value for a 30% stake and assuming a 5% to 6% dividend yield and 90% dividend payout).
“As such, we do not rule out the possibility of a combination of base rents and user fees,” it adds.
According to Maybank IB Research, this REIT structure is not without its share of complexities. “Airports are in constant need of maintenance capex. Furthermore, most airports will reach their design capacity over a 10-year cycle and require major capacity expansion. Malaysia’s REIT structure only allows a 15% provision for expansion and this might not be sufficient for airports, we think.
“The Malaysian REIT sector is yielding an average of 6.3% in 2018. Assuming that this ReitCo pays 6.3% yield, it will have to pay RM252 mil in dividends for the equivalent RM4 bil asset value not owned by the government. This does not appear to be much of a problem given that MAHB’s user share payment to the government exceeds RM400 mil per annum and is growing in tandem with traffic growth.”
The research house points out there could be a simpler way.
“An alternative method is for the government to issue a collateralised asset-backed bond; whereby the airport asset is the collateral for the bond. We think this is a much simpler option and given that it is government backed, the rating agencies will confer it with a sovereign rating.
“As such, the coupon yield will be much lower (estimated at 4%, in tandem with MGS yields) as compared to the average REIT yield of 6.3% (2018F average). However, this also means that the government’s official debt figure would rise, and so this strategy would run counter to its agenda of paring the national debt.”
However, Shukor believes a REIT may be just the answer for the government to raise capex for airport expansion.
“In this case, yes, because government-linked funds will very likely be obliged to take the REIT into their portfolios.
“Foreign funds will, however, not be interested because the airports on offer are neither attractive nor world class, like Changi or Incheon,” he explains.
Shifting of roles
While the mechanism for the airport REIT is being worked out, Raja Azmi is hoping to conclude talks on the terms of the RAB and its renewed OA, which governs its concession to operate 39 airports nationwide until 2069.
“As far as the OA extension is concerned, we envisage to get it finalised on our part before the end of the year. As for the RAB framework, we hope to get it finalised with the regulator, Mavcom by mid next year.
“So, what this means is that the OA has got a framework for us to actually move forward in an environment where we shift from a pure operator role to an operator cum developer where we undertake some capex. This capex can be undertaken by MAHB to an extent where some of terms and conditions in the operating agreement can be reviewed.
“The user fee structure now is designed as though the government undertakes the capex but we want to shift that role to MAHB undertaking some of the capex, for example, reviewing the user fee increase. This is to make it palatable for MAHB to undertake the capex,” Raja Azmi says.
The user fee is currently pegged at 11% of MAHB’s revenue. Based on its financial year ended Dec 31, 2017, the airport operator paid RM391.78 mil in user fee to the government. The payout is significant when compared to MAHB’s FY17 net profit of RM236.5 mil on the back of RM4.65 bil revenue.
That’s not all as MAHB may have to make bigger payouts in the future as the current ceiling rate in the existing OA is 33%, with a step-up mechanism that increases the user fee by 0.25% annually.
Under the agreement, it also allowed a 0.3% increase for every RM100 mil that the government spends to improve or upgrade the airports under the concession.
Apart from the airport REIT proposal, the government will also impose a departure levy on international passengers from June 1, 2019.
The levy will be applied to every international departure at a rate of RM20 to Asean destinations and RM40 to other regions. Maybank IB estimates this will deliver more than RM766 mil per annum.
“MAHB is largely unaffected but it is negative for airlines. We cut our FY19-20 earnings forecasts for AirAsia Group Bhd and AirAsia X Bhd on yield erosion and downgrade AirAsia Group to hold and AirAsia X to sell. MAHB is the sole buy. We remain neutral on the sector,” the research house adds.
However, Mavcom recently warned that the departure levy to be imposed may contravene the International Civil Aviation Organisation’s (ICAO) guidelines and international good practices.
Mavcom said the ICAO’s policy on taxation and charges for airports and air navigation services states that any costs imposed on travellers should be used for the benefit of the aviation industry. Any collection not intended for that is considered a form of tax and the ICAO is against such taxes, especially when they are absent from other modes of travelling.
“This is distinct from airport charges such as the PSC (passenger service charge) which generates revenue for the airport operator and serves to fund the cost of airport operations,” it said in a Budget 2019 Commentary.
The levy will increase non-airfare costs to passengers in Malaysia by 57.1% and 54.8% for outbound travellers to Asean and beyond Asean respectively, said Mavcom. “This is in comparison to the current PSC of RM35 per passenger to Asean countries and RM73 per passenger to destinations beyond Asean as well as the Regulatory Service Charge of RM1 per passenger,” it added.
More recently, Mavcom estimates that Malaysia’s passenger traffic will grow to between 100.3 million and 101.1 million in 2018 despite an estimated slower growth rate of between 1.1% and 2.2%.
It explained that the low single-digit growth was due to a reduction in domestic capacity by Malaysian carriers.
“At the same time, growth in international traffic is expected to surpass domestic traffic growth for the third consecutive year,” it added.
Meanwhile, Mavcom predicts passenger traffic growth in 2019 to range between 2.2%and 3.3%, to be supported by private consumption and potentially lower airfares as airlines shift their route network focus to short- and medium-haul destinations from long-haul destinations.
Despite the slower travel growth, the airport operator managed to turn in a better performance.
In the nine months ended Sept 30, 2018, MAHB posted a surge in net profit to RM699.21 mil from RM207.47 mil a year ago while revenue rose to RM3.6 bil from RM3.4 bil.
The higher net profit was partly due to unrealised gain on the fair value of investment in GMR Hyderabad International Airport Ltd amounting to RM258.4 mil and higher revenue of RM194.8 mil.
Affin Hwang Capital notes that MAHB’s strong set of results were above consensus and its expectations. “9M18 core net profit doubled to RM411 mil on higher revenue, improved Ebitda margin and lower effective tax rate. In particular, the group delivered a stellar 3Q18 core net profit of RM168 mil (+97% qoq) on the back of higher revenue and Ebitda margin,” it says.
The fate of MAHB lies pretty much on the outcome of the OA and RAB but over the longer term, it would probably need a different formula to ensure it stays on investors’ radar. FocusM