MALAYSIA AIRPORTS HOLDINGS BERHAD (MAHB) - ANOTHER MONOPOLY GLC THAT NEEDS A REVIEW? by e.s. shankar

by E.S. Shankar
($ represents Malaysian Ringgit)

MAHB was incorporated in 1992 by the GoM and given a monopoly licence to build, operate and manage all airports in Malaysia. It was listed on the KLSE in November 1999 with the GoM holding a golden share. Khazanah holds 33% of MAHB shares, EPF 10% while about 43% is held by foreign investors.

Today, it operates 39 airports including 5 international airports of which KLIA and KLIA2 both at Sepang, Selangor are the jewels in the crown. It has also expanded operations overseas to Turkey where it owns 100% of the licence for operating and managing the Istanbul Sabiha Gokcen International Airport (ISG).

The KLIA site alone encompasses 22,165 acres. MAHB'S licences for KLIA, KLIA2 and designated airports are as follows:

1.  25 years from 2009-2034 in Malaysia

2. Additional 35 years from 2034-2069 in Malaysia. This extension was granted in December 2016. The rationale for this unusually long extension has not been explained by GoM, given that it was granted in the run up to the general elections.

3. 24 years from 2008-2032 for ISG, Turkey.

MAHB's profit after tax, though fair, have not been spectacular over the last 20 years, given its monopoly and support from the government. In particular, we should take note of the results and statistics over the last 3 years:

A good portion of MAHB's income is derived from Passenger Service Charge (PSC) which is  imposed by law on all air travellers and is subject to increases based on 5-yearly reviews. Currently, the charges are Domestic $11, ASEAN $35 and International $73. 

It also receives a portion of charges which are included in the PSC even when travellers DO NOT use the KLIA Express Link. MAHB also charges GoM 4.5% - 7.5% on construction charges for airport expansion. 

A review of MAHB's monopoly is necessary for the following reasons, besides the fact that it has an extremely low and unacceptable return on assets employed as stated above:

1. When KLIA2 was mooted, an Air Asia-Sime Darby consortium had proposed to the GoM for it to be awarded the design and construction contract. However, GoM gave the rights to MAHB at $1.7 billion. Close to completion, it was revealed that the costs had more than doubled to $4 billion. The opening was delayed to early 2014. A PAC inquiry concluded that it was nonsensical to claim that KLIA2's main customer, Air Asia, was to be blamed for the incredible cost escalation. CLICK HERE - PAC SLAMS MAHB OVER KLIA2 and HERE - DAP QUESTIONS MAHB.

However, MAHB's 2014 audited accounts show that $5.4 BILLION was transferred from Capital Work-In-Progress to Terminal Building, of which $4 billion was related to KLIA2 construction. So, what was the true cost of KLIA2, including interest, plant and equipment, fixtures and fittings and commissioning costs? Particularly since it has been criticized as being user unfriendly and described as a "cattle barn"! (Wherever we find the grubby fingers of Najib and his ex-government of thieves, we often get peculiar answers to straightforward questions. E.g. How much does a Proton cost? Answer: Excluding the engine, seats and shell, the ignition and exhaust system costs are the lowest in this part of the region!!!).

A review of the entire KLIA2 cost should focus on whether there were properly conducted open tenders, who were awarded contracts and on what basis, variation orders and if costs were in line with market rates

2. There are too many sweetheart concessions given to MAHB:

(a) The 35-year licence extension for KLIA and KLIA2.

(b) Profit of 4.5% - 7.5% on construction contracts when it has a monopoly licence.

(c) Entitlement to charge for those not using the KLIA Express Link.

(d) The concession to "settle Residual Payment to the GoM in a manner that would not significantly deplete Group cash reserves and take into account the Group's Reserves and business plans". Such a giveaway would never have been conceded in an open tender licence.

(d) Another unusual entitlement - recovery of certain costs for "incurring marginal losses arising from socio-economic and GoM policies" referred to as MARCS.

3. MAHB's debt:equity ratio is about 80%. However, there is no explanation why finance costs for 2015-2017 averages an incredible 11%!!!

4. MAHB is ranked 48 out of the top 50 for aero revenue. Without a shadow of a doubt too, KLIA and KLIA2 are light years behind the facilities and standards established by Singapore's Changi Airport which was ranked the top airport in the world for the 6th consecutive year. Malaysia ranks 44. CLICK HERE.

5. MAHB's employment policy is not sufficiently inclusive:

(a) Management - 86% Malay, 8% Chinese, 4.5% Indian, 1.5% East Malaysian.

(b) Executive - 92% Malay, 2% Chinese, 4% Indian, 1% East Malaysians, 1% Others.

(c) 17 Directors of the company - 15 (88%) including the Chairman and CEO, Malay and 2 (12%) Chinese.

(d) 28 directors of subsidiary companies - 21 (75%) Malay, 2 (7%) Chinese, (18%) Indian/Others

An examination of the audited accounts of Petronas, PTPTN, Khazanah, Tabung Haji, FGVH, EPF, Socso and many other GLC's and Statutory Bodies will show a similar bias in employment policies.  After 48 years of the New Economic Policy (NEP) and affirmative action favouring the majority, it's time for all these GLC's to switch to meritocracy.

MAHB must however be congratulated for its high level of transparency and disclosures in its annual reports as well as its minimum 50% profit after tax dividend payout policy. This is reflected in its share price which is trading at about $8.75, PE ratio of 28 and market capitalization of $14 billion.

6. In 2014 alone, MAHB invested over $2 billion in acquiring the balance of 80% in ISG Turkey. It has about $10 billion to recover from ISG concession and licence rights and terminal building costs. The CEO's 2017 report says that the Turkey operations lost $237.5 million before tax. There should be a thorough review of this overseas foray, given that Turkey has not exactly been the most stable country in the world for many years now and its future is much in doubt. In chasing the extra ringgit, has MAHB bitten off more than it could chew?

Source: MAHB 2017 Annual Report. CLICK HERE.