- We maintain our HOLD rating on Malaysia Airlines (MAS) at
unchanged fair value of RM1.25/share following the release of its 1Q12 results.
Our valuation continues to peg MAS at 0.9x FY12F book value of RM1.38/share.
- MAS reported a core net loss of RM348mil for its 1Q12, excluding
net gains on derivatives and forex of RM176mil. We consider the results within expectation
as loadstypically swing strongly in 2H of the year, which is typically when the
bulk of profit is generated.
- We were positively surprised that despite higher jet fuel price
(+10% YoY), MAS’ core losses actually narrowed by 9%. Yields were up by some
12% YoY, driving RASK higher by 8% YoY, despite a deterioration in load factor
(-4% YoY).
- The significant improvement in yields was driven in part
by improvement in front cabin loads and capacity cuts (-8% YoY). Though this
was driven by fare discounting to a certain extent, front cabin fares are a lot
higher than that of economy class – impact is still a net positive for systemwide
yields. Management is also reviewing contracts with suppliers e.g. catering,
though numbers are currently not forthcoming.
- We are concerned however, that competitors are reacting by
also discounting fares given weak underlying demand currently. Recent
indication by Singapore Airlines is that it will continue to be yield active to
drive pax traffic. Cathay had also guided for weak pax traffic outlook, citing possible
capacity cuts in the near-term.
- A positive announcement that came out yesterday were proposals
to undertake funding, split into 3 main categories: (1) A RM2.5bil Sukuk with a
perpetual life which will be treated as equity capital; (2) RM5.3bil finance lease
aircraft funding via an SPV to be owned by MoF – specific for six new A380s and
two A330 deliveries; (3) Commercial funding for remaining aircraft deliveries.
All these are to be finalised within the next 2-3 months.
- The funding addresses risks of a cash call that we highlighted
previously and we see this as positive news. We estimate the new funding will
increase interest cost by RM300mil-RM390mil/annum (at 4%-5% interest cost) though
this has been partly factored into our projections as aircraft funding.
- MAS’s shares have retraced by 26% since early this year and
valuations now look a lot more attractive at 0.7x FY12F PBV. However, we remain
conservative for the time being given a tough operating environment (which
could see underlying sector valuation deteriorate) and pending execution of
funding and cost restructuring plans.
Source: AmeSecurities
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