Malaysian Airline - More details on recent corporate proposals

News      MAS has released more details on its recent corporate proposals announced i.e. (1) a reduction of its par value from RM1.00 to RM0.10, (2) a reduction of its share premium account and (3) a rights issue with a targeted gross amount to be raised up to RM3.1b, in an announcement to Bursa Malaysia. The details of the rights proceeds were also disclosed in the announcement.

  

Comments   MAS will convene an EGM on 5 March 2013 to seek shareholder’s approval for the corporate proposals. The entire corporate proposal transaction will be completed by 2Q13. 

 We are neutral on the announcement as the proposals had already been announced earlier during its previous 3Q12 results in November 2012. However, we take comfort that the announcement stated the scenario for the basis of the rights issue entitlement. Some of  the key salient points in the announcement (refer table 1, page 2 for scenario analysis) are:

(a)  The illustrative entitlement ranges from 7 rights for 4 shares, 3 rights for 2 shares and 5 rights for       4 shares.

(b)  Gross proceeds will be up to RM3.1b (maximum).  The big chunk of the proceeds will be utilised for  its working capital (43%) followed by capex (32%) and repayment of the existing borrowings (25%). The repayment of the existing borrowings will save up to RM39m of its financing cost while the capex is mainly for the progressive payments for its new aircraft orders for the next two years i.e. 17 units of B738 and 5 units of A330. (Refer to Table 2, page 2).      

  

Outlook      While its operating statistics showed encouraging results in 4Q12, yield improvement will remain as a key challenge for MAS amid intensifying competition from its regional peers. 

  

Forecast     We have tweaked our FY 13E forecast higher by 18% as we imputed in the possible finance cost savings from the proposed rights issue, and also a new higher load assumption.

  

Rating    Maintain MARKET PERFORM

 Due to the risk of higher crude oil prices, we do not expect MAS to make a major turnaround in FY13. 

  

Valuation   We have reduced our TP from RM1.06 to RM0.69 based on FY14E EPS of 19.8 sen. We have also imputed in the potential dilution of its FY13 by 57%. We have assumed a rights price of RM0.60 per share (Refer to highlights in Table 1, page 2).

  

Risks     Spike in fuel prices above USD130/barrel, and a lower exercise price, which could lead to further dilution in its EPS i.e. from more new shares issued.    

Source: Kenanga