MAS (FV RM1.38 - TRADING BUY) 1QFY12 Results Review: Heading Into Clearer Skies

MAS’ 1Q core losses exceeded our and consensus full-year forecasts.  We consequently raise our loss forecast for FY12 and the carrier is now only expected to post a decent EBITDA by FY13. On a positive note, yields and unit CASK (Cost/ASK) are turning favourable for MAS and more importantly, funding for its RM6bn fleet expansion is close to being resolved, which should boost sentiment on the stock. We upgrade MAS to a TRADING BUY with a higher FV of RM1.38 that is premised on 7.5x FY14 EV/EBITDA.

Losses narrowing. Stripping out the forex, disposal gains and other exceptional items (totaling RM233m), MAS’ 1Q net loss came in at RM405m on the back of RM3.108bn in revenue. The losses far exceed both our and consensus full-year estimates, no thanks to the higher-than-expected fuel and aircraft leasing expenses despite revenue being in line. Nonetheless, losses have narrowed by 58% q-o-q and only higher by 6.3% y-o-y, due to the lower fuel consumption following capacity cuts (by 7.7% y-o-y and 8.2% q-oq). This was despite jet fuel price per barrel inching up by 13% over the period.

Unit yields and costs turning positive. MAS managed to boost yields y-o-y by 12.5% to 27.1 sen/RPK after trimming its unprofitable routes to focus on the high-yielding ones, notably its Kangaroo routes and improved front-end cabin take-up amid the withdrawal of some AirAsia X long-haul flights. The reduction in capacity has also improved yields from the cargo side. MAS was wise to focus on boosting yields (hence higher ticket prices) instead of competing head on with AirAsia for both domestic and international routes. The sequential decline in yields by 6% q-o-q can be attributed to seasonality. While yields are up, cost remains stubbornly high as MAS’ CASK of 27.7 sen continued to inch higher by 5.4% y-o-y which is higher than SIA’s quantum of 3.3% (9.4 cents). MAS’ high costs structure remains a concern given its high breakeven load factor of 102% (an improvement from last year’s 109%) and there is still plenty of room for cost structure improvement with the delivery of brand new aircrafts which ultimately will improve fuel burn mileage given the younger fleet age.

Capex resolved. We were previously concerned over how MAS will finance its RM6bn worth of capex for its fleet of aircraft deliveries in 2012 (which amount to 23 aircraft comprising 13 737-8s, 5 A330s and 5 A380s) to enhance the fleet age to 7.7 years from the current age of 12.2 years, after potentially returning 34 old aircrafts to its lessors by the end of this year. We understand only 1 aircraft was returned in 1Q so far given the issue of capex standstill. However, after MAS announced its 3 pillars of financing in the near term, we do not see the delivery of new aircrafts being an issue although this might be delayed a few months to 1H2013. A young fleet age will be favourable towards improving fuel efficiency and yields, and ultimately boosting MAS’ profitability. 

Source: OSK