We maintain our HOLD rating on Malaysia Airlines (MAS) with
an unchanged fair value of RM1.25/share, following the release of its 4Q11
results. Our valuation continues to peg MAS at 0.9x FY12F book value of
RM1.38/share.
MAS reported a net
loss of RM1.3bil for 4Q11, which brought the full-year net loss to RM2.5bil.
The results were dragged by some RM1.09bil provisions comprising: (1) RM602mil
for redelivery of aircraft; (2) RM314mil of impairment of freighters (2 B747F
and 4 A330F); (3)RM179mil provision for stock obsolescence.
Excluding these provisions, MAS would have reported a core
net loss of RM1.3bil, which was in line with our estimate of a RM1.28bil net
loss for FY11, but slightly deeper than consensus’ projected net loss of
RM1.2bil.
Management explained that the huge provisions for aircraft
re-delivery was due to an accelerated return of 58 aircraft to lessors between
FY12-14, of which 34 are expected to be returned in 2012.
Core operating results were poor in 4Q11. The core net loss
of RM232mil compares poorly against a RM60mil core net profit in 4Q10. While
yields rose 9% YoY, the main drag came from a sharp drop in load factor to
72.5% (4Q10: 77.4%), reflecting MAS’s weak pricing power. Pax traffic dropped
some 6% YoY, while ASK was more or less flattish.
Operating outlook looks tough in our opinion, as jet fuel price
remains high (currently hovering circa US$135/barrel). Our current projections
already assume jet fuel to average at circa US$130/barrel. An every US$1 increase
will reduce earnings by 9%.
On top of this, we see the risk of a cash call looming. MAS is
expected to take delivery of five A380s this year (we estimate capex of circa
RM3.1bil), with the maiden two deliveries
in 1H12. A tough operating outlook (1Q and 2Q are typically weakest for MAS),
coupled with dwindling cash balance of RM1bil, suggests that the group may be required
to recapitalise to honour aircraft deliveries. Management is looking at several
options, including sale of non-core assets and debt-raising, but does not rule
out coming to the market, though equity would be the most expensive
option.
From a valuation standpoint, MAS is not cheap, trading at 1x
FY12F book value of RM1.38/share, which is at par to more established airlines;
Singapore Airlines and Cathay Pacific. We suggest investors switch out of MAS
into AirAsia (BUY, FV: RM4.20/share) for exposure to the Malaysian aviation
sector.
Source: AmeSecurities
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