MAS posted better profits in line with our and consensus projections, swinging back to EBITDA of RM147m for 3Q vs a RM859m loss in 3QFY11. However, yields were toppish while cost per unit did not budge as the airline operated below its breakeven load factor. Our earnings estimates for FY12 and FY14 are unchanged but we see MAS facing a mounting challenge to cut costs near term. This prompts us to lift our core loss estimate by 15% for FY13. And now, it’s déjà vu in the case of MAS’ third cash call since 2007 – now to raise RM3bn - which will potentially enlarge its share base by 60%. Ex-rights, we lower the FV and downgrade MAS back to a SELL, at RM0.52 FV.
Encouraging results. MAS reported a 3QFY12 core net loss of RM63m vs losses of RM206m and RM247m in 2QFY12 and 3QFY11 respectively. YTD the core loss of RM675.2m appears on track to hit our full-year loss estimate of RM775m, which is in line with our and consensus estimates. However, despite its bottomline being in the red owing to high depreciation and interest costs, MAS’ 3Q12 EBITDA was positive at RM147m vs a loss of RM859m in 3QFY11, easing the group’s YTD EBITDA loss to RM100m. With a quarter more to go, MAS is on track to reverse to profitability with an estimated FY12 EBITDA at a positive RM34.3m.
Yields may be toppish. MAS’ yields for 9MFY12 measured in revenue per RPK (revenue passenger kilometer) hit 27.6 sen, higher by only 7% YTD, 1% q-o-q and 2% y-o-y. This was lower than we had earlier anticipated, which suggests that yields could be peaking in view of the stiff competition from low cost carriers and other foreign full service carriers in the international segment. The 7% YTD yield boost was attributed to the domestic operation, which grew by only 6% YTD, suggesting that yields from its international operations barely grew. However, with its spanking new aircraft coming in, yields from the international segment may improve moving forward although we are of the view that yield on the domestic side appears to have peaked given the upcoming competition from Malindo, as well as AirAsia’s aggressive fleet expansion.
Costs stubbornly high. The airline division’s per unit capacity cost as measured in cost per ASK (available service kilometer) of 24.9 sen barely budged y-o-y as the lower fuel cost per unit was offset by higher non-fuel expense per unit. Although overall costs cost was flat, the higher yields fetched boosted MAS’ breakeven load factor from 95% to 89%. As long this number remains above the current load factor of 74.5%, MAS would be unable to break even operationally.
Outlook improving. MAS’ outlook remains challenging as competition intensifies while at the same time it is unable to bring costs down drastically. Staff costs are not in for any cuts in the near term as Management has clearly stated that any reduction in workforce would be through normal attrition. Nonetheless, we continue to bank on its upcoming new aircraft, which may help to boost aircraft utilization, and reduce fuel burn and maintenance charges to bolster its bottomline.
Aircraft deliveries and yield outlook. According to MAS’ last delivery guidance two quarters ago, 23 aircraft are to be delivered in 2012 (of which 5 are A380s) while 34 will be returned to their lessor, resulting in an 8% drop in capacity YTD. According to media reports, the aircraft to be delivered next year are six A380s and two A330s, although this could be offset as the airline surrenders more leased aircraft. Our assumptions assume a 5% capacity growth for FY12 on the back of 1% growth in yield, with the decline in yields from the domestic side being offset by better yields from the international segment.
More dilution, once again. As we had cautioned earlier, MAS finally announced a rights issue given its high cash burn rate and need to fund its aircraft acquisitions. This will be the airline’s third cash call after Jan 2007 when it raised RM1.2bn and in Dec 2009, from which it raised RM2.7bn. To fund its working capital and capex in the near term, MAS will be drawing down RM3.4bn this quarter from the recent SPV set up by the Ministry of Finance (with a total financing facility of RM5.3bn). The proposed rights issue could potentially raise as much as RM3.1bn for working capital, capex and the repayment of borrowings, as shown in Figure 1 below. The price of the rights shares has yet to be finalized but in order to raise RM3.1bn, an illustrative price would be RM0.60 per rights share. This may see MAS’ share base bloating from 3,342.16m to 8,355.39m shares, based on an entitlement of 3 Rights Shares for every 2 shares held. The discount to its theoretical ex-rights price (TEAP) is 21% on its 5-day VWAP, which would consequently dilute the stock’s EPS by 60%. Prior to facilitating the upcoming rights issue, MAS will be undergoing a Proposed Capital Restructuring, which will see its par value shrinking from RM1 to 10 sen, as well as a reduction in its share premium account to reduce its accumulated losses.
Aircraft deliveries and yield outlook. According to MAS’ last delivery guidance two quarters ago, 23 aircraft are to be delivered in 2012 (of which 5 are A380s) while 34 will be returned to their lessor, resulting in an 8% drop in capacity YTD. According to media reports, the aircraft to be delivered next year are six A380s and two A330s, although this could be offset as the airline surrenders more leased aircraft. Our assumptions assume a 5% capacity growth for FY12 on the back of 1% growth in yield, with the decline in yields from the domestic side being offset by better yields from the international segment.
More dilution, once again. As we had cautioned earlier, MAS finally announced a rights issue given its high cash burn rate and need to fund its aircraft acquisitions. This will be the airline’s third cash call after Jan 2007 when it raised RM1.2bn and in Dec 2009, from which it raised RM2.7bn. To fund its working capital and capex in the near term, MAS will be drawing down RM3.4bn this quarter from the recent SPV set up by the Ministry of Finance (with a total financing facility of RM5.3bn). The proposed rights issue could potentially raise as much as RM3.1bn for working capital, capex and the repayment of borrowings, as shown in Figure 1 below. The price of the rights shares has yet to be finalized but in order to raise RM3.1bn, an illustrative price would be RM0.60 per rights share. This may see MAS’ share base bloating from 3,342.16m to 8,355.39m shares, based on an entitlement of 3 Rights Shares for every 2 shares held. The discount to its theoretical ex-rights price (TEAP) is 21% on its 5-day VWAP, which would consequently dilute the stock’s EPS by 60%. Prior to facilitating the upcoming rights issue, MAS will be undergoing a Proposed Capital Restructuring, which will see its par value shrinking from RM1 to 10 sen, as well as a reduction in its share premium account to reduce its accumulated losses.
Who will subscribe for the rights shares? MAS has obtained an irrevocable and unconditional letter of undertaking from its major shareholder, Khazanah Nasional Bhd (who owns 69% of its shares), to subscribe in full for its entitlement of the Rights Shares. Assuming an issue price of RM0.60 per share, the discount of 21% to its TEAP does not look attractive at all. The airline’s rights issue in 2007 and 2009 were priced at 40% and 32% discounts respectively, with the last one being over-subscribed by 7.67%. This time around, there is a high risk that the discount could be even steeper as many investors are already weary of MAS’ many cash calls. On the positive side, the proposed rights issue will boost MAS’ current net gearing of 3.1x to just under 2x, hence allowing it to take on more borrowings.
Lowering estimates on bleak prospects. Our earnings estimates for FY12 and FY14 are unchanged but in the near term, we see MAS facing a mounting challenge to slash costs. This compels us to lift its estimated core losses by 15% to RM80.7m from RM70m for FY13. We are also projecting for MAS’ earnings to hit RM473m by FY14m, although we caution that a sustainable improvement in profits is currently not visible. Although premature, we are incorporating the Rights Issue into our earnings projections, as the exercise will dilute the EPS per share by 60%.
Lowering estimates on bleak prospects. Our earnings estimates for FY12 and FY14 are unchanged but in the near term, we see MAS facing a mounting challenge to slash costs. This compels us to lift its estimated core losses by 15% to RM80.7m from RM70m for FY13. We are also projecting for MAS’ earnings to hit RM473m by FY14m, although we caution that a sustainable improvement in profits is currently not visible. Although premature, we are incorporating the Rights Issue into our earnings projections, as the exercise will dilute the EPS per share by 60%.
Downgrade to SELL. The announced Rights Issue took us by surprise as we had not expected MAS to resort to such a desperate move, this being the national airline’s third cash call since 2007. MAS is still unable to generate sustainable profits even on a q-o-q basis. As a result of the potential dilution, our new FV - premised on higher 8x FY14 EV/EBITDA - is now lower at 52 sen. Hence, we downgrade MAS to a SELL from a BUY. Our previous RM1.38 FV was premised on 7.5x FY14 EV/EBITDA. At the current share price, MAS still looks expensive across all metrics even if the earnings outlook is now more positive.
Source: OSK
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