Results

Below Expectations – 1Q13 core net loss at RM340.4m vs. HLIB’s FY13 estimates of RM572.8m loss and consensus’s RM14.9m loss.

Deviations

Worse than expected yield pressures.

Dividends

None

Highlights

1Q13 revenue increased only by 10.8% despite passenger demand increased by 16.5% yoy (load factor improved to 76.6%) and cargo demand increased by 9.7% yoy (load factor improved to 68.9%). Effective passenger yields dropped 5.2% yoy (see figure #3) and cargo yields dropped by 6.8% yoy.

Operational cost increased 6.5% yoy in tandem with higher capacity (driven by higher frequency and airport charges) and increase in average jet fuel cost from US$130/bbl to US$135/bbl.

MAS received the last RM91m Late Delivery Payment related to A380s in 1Q13.

Management has hedged 15% of jet fuel requirement for the year at jet fuel of US$115/bbl.

MAS is actively pursuing high load factor at the expense of lower yields. MAS targeting international load factor to achieve 83-85%, while domestic at 75-78%. In fact, its A380s are operating at high load factor of >80%.

However, average yields in Asia region had dropped significantly, on continued intense competition among airlines, affecting MAS international yields. Locally, MAS is competing head on with AirAsia and Malindo.

We expect continue yield depression for the remaining years, affecting MAS profitability, despite management’s ongoing effort to turnaround the airlines.

Risks

World crisis (i.e. war, tourism and epidemic outbreak), prolong surge in jet fuel price and the development of high speed train between Singapore and Pulau Pinang.

Forecasts

We increased FY13-14 losses to RM756m and RM417m from RM573m and RM381m respectively (to reflect lower yield assumption), and only expect breakeven in FY15.

Rating

Sell

• Positives –
  • Business turnaround with new management team.
  • Reduced unit operating cost with delivery of new aircrafts.
  • Leveraging on Oneworld Alliance network to improveservices and connectivity.
• Negatives –
  • Restructuring plan (BTP) subject to implementation risk.
  • Competitive pressure on airfare from LCCs and FSCs.
  • High jet fuel prices.

Valuation

• Maintain sell with lower Target Price of RM0.28 (from RM0.30) based on lower 6.8x adjusted FY14 EV/EBITDAR.

Source: Hong Leong Investment Bank Research - 30 May 2013