PETALING JAYA: Maybank Investment Bank (Maybank IB) Research has cast doubts on the outlook of the speculated merger between airport operator Malaysia Airports Holdings Bhd
(MAHB) and Malaysian Aviation Group (MAG), the entity that runs national carrier Malaysia Airlines Bhd.
In a research note released yesterday, Maybank IB Research said MAG’s effective business model as an airline is cyclical and its earnings outlook is not as explicit compared to MAHB’s.
“In our view, a merger would raise questions on corporate governance and may strain MAHB’s cash flow to the point that a new operating agreement may not be very meaningful and even raise the cost of flying in the long term,” Maybank IB Research said.
While Malaysian sovereign wealth fund Khazanah Nasional Bhd owns 33% of MAHB and 84% of MAG, the research house said there is little obvious synergy between MAHB and MAG.
This is because the former manages airports and the latter airlines, although on the surface it would appear the merger could improve MAG’s competitiveness with budget carriers and new airlines.
“This implies that MAHB may have to charge lower landing and parking (L&P) charges as well as passenger service charges (PSC) to MAG, which will be seen as a corporate governance issue and will not sit well with MAHB minority shareholders,” said Maybank IB Research.
On top of the issue of business nature, the research house is also concerned about MAG’s financial performance.
Maybank IB Research reported that for 2022, MAG’s net loss of RM344mil was its best financial performance “in a long time”.
In spite of the improved performance, MIB opined that it is no guarantee that MAG will not generate heavy losses again.
“If it does (incur heavy losses) and the new operating agreement follows the second Malaysian Aviation Commission consultation paper, MAHB will have to invest RM3bil or more until 2026 for the new baggage handling system and Aerotrain at KLIA.
“It will also have to expand the Penang and Subang airports as well as financially support MAG.
“The aforesaid paper does not envision MAHB raising charges markedly until 2027.”
Maybank IB Research opined that the aforementioned projects are unlikely to be entirely equity-financed by MAHB, given its net debt of RM5bil as at the end of the first quarter of 2023.
Hence, it will likely need to resort to debt markets for financing.
“In our view, debt holders would require higher interest or profit rates to account for the cyclical nature of MAG’s business model should it be merged with MAHB.
“Should MAHB adopt the regulated asset base model which passes on cost to consumers in 2027, the higher interest or profit rates will eventually result in higher L&P charges and PSC.”
Maybank IB Research has maintained a “hold” call on MAHB, with a target price of RM6.99 pending more clarification on the merger consideration.
