Malaysian Airline System - Buying Turboprops Worth RM3bn

THE BUZZ  
MAS  announced  yesterday  that  it  has  inked  a  MoU  with  ATR,  a  French-Italian  aircraft manufacturer, to purchase 36 brand new ATR 72-600 aircraft worth a total of RM3bn. Of the  36  aircraft  ordered,  Firefly  will  take  on  20  whilst  the  balance  of  16  will  be  inducted into the fleet of its sister company MASwings. 
 
OUR TAKE   
A  meaningful  investment.  The  purchase  of  these  aircraft  will  allow  both  Firefly  and MASwings  to  expand  their  route  networks,  which  we  are  positive  on  given  the  strong demand  of  the  niche  market  where  competition  is  fairly  limited.  Firefly  intends  to  add frequencies  to  existing  routes  to  Penang,  Selangor  and  Kota  Bahru,  while  new  routes planned  are  to  destinations  in  Thailand  and  Indonesia.  Meanwhile,  the  additional frequencies  for  MASwings  will  act  as  feeder  traffic  for  MAS'  hubs  in  Kuching  and  Kota Kinabalu. We deem  the aircraft  purchase  to  be a  meaningful  asset  investment  as  both the  fleets  are  heavily  utilized.  Firefly's  current  average  load  factor  stands  at  70%  and yields  fetched  can  be  relatively  high.  Firefly  remains  a  profitable  entity  although  the profits were not disclosed by management. 
 
Maintaining  a  young  fleet  age.  Currently,  Firefly  operates  12  ATR  72-500s,  while MASwings operates 10 similar aircraft. The delivery schedule of the new orders – three in  2013,  five  in  2014,  six  by  2015,  and  the  remaining  in  subsequent  years.  Some  of these  aircraft  delivered  will  replace  the  older  aging  aircraft  to  attain  a  young  fleet  age profile. Firefly’s current fleet age profile is 4.5  years  while  MASwings’ is 3.2  years. We understand that Firefly is looking to expand its total fleet size to 20 aircraft in three years. As such, we reckon that half of these orders could be for fleet replacement. Funding for these aircraft will be tapped from  MAS’ recent sukuk issuance and the upcoming rights issue.  
 
Maintain  SELL.  While  the  move  to  expand  its  fleet  bodes  positively  for  Firefly,  we believe  it  will  not  be  a  significant  key  earnings  contributor  to  MAS.  While  we  expect  a better  financial  performance  for  MAS  in  the  future,  the  fact  that  the  recently-proposed cash call will significantly dilute its earnings base by as much as 60%. This warrants us to maintain our SELL recommendation on the stock, with an unchanged FV of RM0.52 premised at 8x EV/EBITDA.

Source: OSK