KUALA LUMPUR (June 12): There is little synergy if a merger between Malaysia Airports Holdings Bhd (MAHB) and Malaysian Aviation Group (MAG) were to take off, according to Maybank Investment Bank (Maybank IB).

Maybank IB in a note on Monday (June 12) cited The Edge’s report that there are parties proposing that MAHB merge with MAG.

“As an airline, the latter’s (MAG) business model is cyclical and its earnings outlook less clear than the former’s (MAHB). In our view, a merger would raise questions on corporate governance, 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,” said analyst Samuel Yin Shao Yang.

The research house maintained its earnings estimates on MAHB with a “hold” rating and a target price of RM6.99 pending clarification on the merger.

Yin said that while Maybank IB expects little synergy between an airport (MAHB) and an airline (MAG), the merger may benefit the MAG more than MAHB.  

Firstly, Yin said the merger will help MAG compete effectively with budget carriers and new airlines.  

This, he said, implies that MAHB may have to charge lower landing and parking (L&P) charges and passengers service charges (PSC) to MAG, which will be seen as a corporate governance issue and not sit well with MAHB minority shareholders.

He noted that while MAHB’s cash flow may be strained despite a new operating agreement in FY2022, MAG generated a smaller loss of RM344 million which is its best financial performance in a long time.

“Yet, there is no guarantee that MAG will not generate heavy losses again. If it does and the new OA (operating agreement) follows the second Malaysian Aviation Commission consultation paper, MAHB will have to invest over RM3 billion until FY2026 for the new baggage handling system and aerotrain at KLIA, expand Penang and Subang airports AND financially support MAG,” it added.

“The aforesaid paper does not envision MAHB raising charges markedly until FY2027,” it added.  

Yin said the projects are unlikely to be entirely equity financed by MAHB given its net debt of RM5 billion as at the end of the first quarter of 2023.  

“It will likely have to tap debt markets for financing. In our view, debtholders would require higher interest/profit rates to account for the cyclical nature of MAG’s business model should it be merged with MAHB,” he said.  

Yin said MAHB adopted the regulated asset base model which passes on cost to consumers in FY2027, the higher interest/profit rates will eventually result in higher L&P charges and PSC.

Maybank IB noted that Malaysian sovereign wealth fund Khazanah Nasional Bhd owns 33% of MAHB and 84% of MAG.