Highlights

Major shareholder of MAS, Khazanah has offered to buyout the 30.63% shares owned by minority shareholders at RM0.27/share through capital reduction exercise. The whole exercise will cost Khazanah a whopping RM1.4bn.

The privatization will allows Khazanah greater flexibility on restructuring of MAS, as well provide an opportunity for minority shareholders to exit their investment in MAS, which is subject to risk of failure. 0.24

Comments

Positive on the privatization exercise, and we would advise minority shareholders to accept the offer of RM0.27/share, which is above our existing fair value of RM0.15/share.

The outlook of MAS is of great concern, given the national airline has been suffering core losses since FY2009. The upcoming 2Q14 performance is expected be the worst, due to the after-effect of MH370 incident (March 2014) in lowering load-factor and passenger yields. The recent MH17 incident (July 2014) has further worsen passenger demand.

MAS has undergone 3 times of restructuring and fundraising exercises since 2007, which has not yielded turnarounds due to heavy competitions (especially from LCCs), changing market demand, sub-par economy growth, ineffective management and high cost structure.

Following the privatization, we expect MAS to cut long haul routes, (as MAS can still leverage on Oneworld Alliance) and concentrate on shorter regional and domestic networks, as well as downsize the aircraft fleet and staff number.

Likely beneficiary of the restructuring would be AirAsia X, while losers are AirAsia, MAHB and Brahim. However, we would like to reiterate our positive view on MAHB’s long term prospects, on the growing demand for air travels.

Risks

• Lower than expected jet fuel price.
• Better than expected turnaround plan resulting in sharp earnings improvement.

Forecasts

Unchanged.

Rating

Sell 

Positives – 1) Business turnaround with new management team; 2) Reduced unit operating cost with delivery of new aircrafts; and 3) Leveraging on Oneworld Alliance network to improve services and connectivity.

Negatives – 1) Restructuring plan (BTP) subject to implementation risk; 2) Competitive pressure on airfare from domestic and international LCCs and FSCs; and 3) High jet fuel prices and US$ appreciation.

Valuation

We increased our target price to RM0.27 (from RM0.15) based on the offered price.

Source: Hong Leong Investment Bank Research - 11 Aug 2014