This article first appeared in The Edge Financial Daily on May 3, 2019 - May 9, 2019

KUALA LUMPUR: Malaysia Airports Holdings Bhd (MAHB) is expected to start opening tenders for the overhaul of its baggage handling and aerotrain systems at Kuala Lumpur International Airport (KLIA) in the second half of 2019, according to group chief executive officer (CEO) Raja Azmi Raja Nazuddin.

Speaking to the media after the company’s annual general meeting yesterday, Raja Azmi said the airport operator was looking to start floating tenders for the ageing baggage systems, which have not seen replacement since the airport opened almost 21 year ago.

“These two systems are over twenty years old; therefore this year we are going through an asset replacement plan [for these two systems],” said Raja Azmi.

The additional capital expenditure (capex) on the facilities in KLIA will augur well for the airport operator’s earnings prospects moving forward.

According to analysts, the returns on the capex would be on regulatory asset base (RAB), a funding mechanism that Malaysian Aviation Commission (Mavcom) intends to implement.

The RAB is a funding mechanism for MAHB to invest in local airport development, typically during a three-year period.

The returns on capex are calculated based on the amount of capex invested. In this instance, MAHB charges travellers for using its airports. Under the RAB, the charges would be adjusted to give MAHB reasonable returns that enable it to recoup its investments within a stipulated time frame.

“They [MAHB] get a fixed return on their capex (under RAB)... they are incentivised to roll out their capex. Under the RAB framework, the capex strictly falls under MAHB” said an analyst.

In short, Mavcom would decide how much of a return MAHB can recoup based on the capex invested, and that the tariffs (such as passenger service charge) would be adjusted accordingly to ensure that MAHB can recoup its investment.

Raja Azmi said the group is looking forward to the implementation of the RAB.

“It will enable us to obtain fair returns on any capital investments that we make to improve airport facilities and infrastructure,” he added.

When asked the amount MAHB would be spending on the baggage systems, Raja Azmi declined to disclose the precise figure.

In an interview with The Edge Malaysia weekly in March, Raja Azmi indicated that the airport operator would be looking at spending RM500 million to RM600 million over the next three years as part of its asset replacement programme.

In terms of how the group is looking to fund these two overhaul operations, MAHB confirmed that the projects would be funded by internally generated funds.

According to the group’s annual report for the financial year ended Dec 31, 2018, its cash position stood at RM1.45 billion, an increase of 12.1% from the RM1.29 billion posted in the previous year.

The airport operator’s share price saw a 21.87% decline between Feb 25 and April 11 from RM8.46 to RM6.61 and has rebounded since then, to close yesterday at RM7.60.