- We downgrade MAS to SELL from HOLD and cut our BVbased fair value to RM0.28/share (from RM0.34/share previously) following earnings revisions in this report and a surprisingly weak 3Q13 result.

- MAS’s losses widened in 3Q13 despite it being a typically strong travel period, with a core net loss of RM294mil. This brought 9M13 core net loss to RM669mil, well deeper than our projection of RM283mil in net loss and consensus’ RM570mil in net loss.

- We have revised down our FY13F to a net loss of RM824mil (from RM283mil previously) as operating dynamics seem to be deteriorating further given:- (1) the strength in USD; and (2) a possibly longer than expected weak yield environment. We think it could be tough for MAS to turnaround (i.e. to register full year core earnings) in FY14F as expected earlier. We now expect a turnaround beyond our forecast horizon (possibly in FY16F).

- Despite higher revenue of 5% QoQ and lower jet fuel price in the same period, operating performance deteriorated to a loss of RM176mil from a marginal operating profit of RM8mil in 2Q13. MAS has been expanding capacity aggressively (+20% YoY, +5% QoQ) and while load factor have improved (+6% QoQ to 85%), yields were hit very badly (-16% YoY, -1% QoQ).

- Yield pressure is mainly seen in the domestic market and ASEAN routes, naturally triggered by new competition. Management guided that yield outlook is unlikely to improve in the near-term and that it is reviewing its route network and may cut unprofitable routes and redeploy capacity on more profitable ones.

- Moreover, the cost improvement seen over the 1H13 period now seems to be moderating. On a QoQ basis, MAS’ CASK (unit cost) increased by 4% QoQ and non-fuel unit cost also increased by 3% QoQ (See Table 2).

- The strength in USD hit MAS negatively. Only 10% of MAS’ revenue is denominated in USD while a majority of its cost, (100% of fuel, 75% of maintenance, 20% of landing &handling charges and 50% of meals & commissions) are denominated in USD. Fuel cost alone already accounts for 40% of cost.

- On a positive note, there will only be a net increase of one aircraft in FY14F (taking in 20 new aircraft, redelivering 19 aircraft). Any capacity growth next year is likely to come from further improvement in aircraft utilisation. However, competitors’ aggressive capacity expansion may still impact MAS’ strategy and we remain cautious about this.

Source: AmeSecurities