Malaysian Airline System - Thrown a lifeline HOLD

- According to local dailies this morning, Malaysia Airlines (MAS) has found a taker for RM1bil worth of Sukuk. The RM1bil tranche was issued to KWAP (Kumpulan Wang Persaraan) yesterday. The Sukuk will be utilised as working capital and refinancing of existing borrowings.

- It is also said that MAS has obtained firm commitments for the remaining RM1.5bil tranche of the total RM2.5bil Sukuk programme, “where the takers will be announced in due course”. The Sukuk carries a profit rate of 6.9% per annum for the first 10 years, and balloons thereafter.

- To recap, the RM2.5bil Sukuk is a hybrid capital structure with a perpetual life which will be recognised as equity in MAS’ books. This will improve gearing and allows for recapitalisation with no share dilution, though earnings will be diluted by profits payable on the Sukuk of circa RM70mil/annum – this has been earlier factored in, partially, as interest on aircraft funding in our projections. 

- The Sukuk underpins MAS’ financial restructuring, which also involves: (1) A RM5.3bil finance lease aircraft funding via an SPV to be owned by MoF – specifically for six new A380s and two A330 deliveries; (2) Commercial funding for remaining aircraft deliveries.

- MAS also received a RM1bil capex bridging loan from a consortium of commercial banks to fund deliveries of two aircraft in May 2012, which will be repaid by aircraft proceeds from the proposed SPV funding, expected to be secured sometime in July 2012.

- We maintain our HOLD rating on MAS with an unchanged fair value of RM1.25/share. While we are positive on these developments and acknowledge it is a MAS-specific re-rating catalyst, we believe MAS needs to show a more consistent profit track record before meaningful interest by investors can be restored –  this is not the first time MAS has successfully undergone a recapitalisation.

- Furthermore, a weakening core operating environment suggests increasing earnings risk and deteriorating valuations. We believe share price may react positively to this news today, but the fundamental outlook is still not constructive enough to call a bona fide Buy.

Source: AmeSecurities