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
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