We see MAS potentially reporting decent 4Q results, gauging from the airline’s improved operating statistics. We also believe its coming on board the oneworld alliance could also boost yield and load factor. Overall, its outlook is brightening and we can expect better financial performance from MAS. The group has proposed several corporate exercises to beef up its financials to make a fresh start. Still, we remain cautious on the potential dilution arising from its proposed rights issue. That said, we lift our FV to RM0.81 and upgrade MAS to BUY.
4Q outlook positive, with potential upside surprise. MAS reported stronger EBITDA of RM147m in 3QFY12, which helped to pare down the group’s YTD EBITDA loss to RM100m. Moving on to the last quarter of the year, we expect MAS to report results that will show positive EBITDA, which should reverse its losses and allow it to report an estimated FY12 EBITDA of RM35.0m. This is on the basis that the national airline’s operating statistics had improved substantially in the final quarter of FY12. With a record load factor achieved in December 2012, we suspect that that the airline’s EBITDA could trump our implied estimate of RM130m for 4Q.
Operating stats on the mend. MAS’ overall operating stats improved during the last quarter of 2012, as its overall average load factor rose 2.4% q-o-q and 4.5% y-o-y to 75.3% - its highest since 4QFY10. In particular, its average 4Q load factor of 77.3% was 2.8% better q-o-q and 4.9% y-o-y, with the 81.4% load factor for December being the highest on record since the airline started releasing its operating stats to investors in 2002. The steep 2.8% y-o-y jump in passenger load factor to 77.3% was due to the additional RPK growth from the international segment amid capacity cuts on its non-profitable routes (ASK -1.4% y-o-y). In view of the above developments, we believe that MAS’ yield and revenue should show positive growth in its upcoming results, due anytime this week. For the full year, RPK and ASK dropped by 6.4% and 6.1% y-o-y due to the route network restructuring that MAS undertook from Dec 2011 onwards.
4Q outlook positive, with potential upside surprise. MAS reported stronger EBITDA of RM147m in 3QFY12, which helped to pare down the group’s YTD EBITDA loss to RM100m. Moving on to the last quarter of the year, we expect MAS to report results that will show positive EBITDA, which should reverse its losses and allow it to report an estimated FY12 EBITDA of RM35.0m. This is on the basis that the national airline’s operating statistics had improved substantially in the final quarter of FY12. With a record load factor achieved in December 2012, we suspect that that the airline’s EBITDA could trump our implied estimate of RM130m for 4Q.
Operating stats on the mend. MAS’ overall operating stats improved during the last quarter of 2012, as its overall average load factor rose 2.4% q-o-q and 4.5% y-o-y to 75.3% - its highest since 4QFY10. In particular, its average 4Q load factor of 77.3% was 2.8% better q-o-q and 4.9% y-o-y, with the 81.4% load factor for December being the highest on record since the airline started releasing its operating stats to investors in 2002. The steep 2.8% y-o-y jump in passenger load factor to 77.3% was due to the additional RPK growth from the international segment amid capacity cuts on its non-profitable routes (ASK -1.4% y-o-y). In view of the above developments, we believe that MAS’ yield and revenue should show positive growth in its upcoming results, due anytime this week. For the full year, RPK and ASK dropped by 6.4% and 6.1% y-o-y due to the route network restructuring that MAS undertook from Dec 2011 onwards.
High depreciation expenses may dent bottomline. Although we expect positive EBITDA for the airline, its aggressive plans to renew its fleet may lead to escalating depreciation expenses, which will consequently hit its bottomline. As such, we are still forecasting for MAS’ to end up in the red for FY12 and report a core net loss of RM728m. This implies that its core net loss for 4Q may narrow to RM52m, although we think some exceptional gains could potentially lift the bottomline into positive territory. Nevertheless, efforts to renew its aircraft and keep its fleet young are positive over the longer term.
Cheers to oneworld alliance’ tie-up. As MAS has been operating at an average load factor that is below breakeven, it has been struggling operation-wise. However, things could possibly change for the better as MAS joined the oneworld alliance starting 1 Feb 2013. With more passengers fed from other oneworld alliance members, we believe this could possibly help to boost its yield and revenue. Furthermore, being the only ASEAN airline in the oneworld alliance would clearly be a big positive for MAS in that this will lift its load factor. For example, we understand that connecting flights from MAS’ oneworld alliance airlines landing in Bangkok has boosted the load factor of MAS’ flights connecting KL and Bangkok. Furthermore, we see more conversion of loyalty points as more connectivity routes are offered to lure passengers, which would be positive for MAS.
Corporate exercises get clearer. MAS has proposed to reduce the par value of its shares from RM1.00 each to RM0.10 to partially set off its accumulated losses of RM7,863.7m. The company has also proposed to reduce its share premium to set off against those accumulated losses. What is of concern to investors is that MAS is making a rights issue for the third time since Jan 2007. This time, it is proposing to raise RM3.1bn and use the proceeds mainly for: (i) working capital (43%), (ii) capital expenditure (32%) and (iii) repayment of borrowings (25%). MAS will hold its EGM on 5 Mar 2013 to seek shareholder approval on the corporate proposals. The entire proposal will be completed by 1HFY13.
Corporate exercises to prepare for a fresh start. We expect MAS’ efforts to cut its accumulated losses, repay borrowings and spend on expansion, together with its participation in the oneworld alliance to boost its load factor and yield. We see this as a move towards ‘refreshing’ its financial positions and make a new start,. Nevertheless, the long term plan is no doubt positive, although there will be short term pain for investors since the exercise will dilute its earnings by approximately 60%, based on the assumption of 3 Rights Shares for every 2 shares held.
Impact from HSR too far to call. As we highlighted earlier, plans to develop the HSR (High Speed Rail) connecting Kuala Lumpur and Singapore may have negative impact on full service carriers like MAS. However, we are of the view that it may still be too early to gauge the impact as it would be several years before the HSR sees daylight. As such, we are not pricing this in as yet.
Upgrade to BUY; FV revised to RM0.81. We are still cautious on the intensifying competition from MSS’ regional peers, which may affect yield growth, and the potential 60% earnings dilution arising from its proposed rights issue. That said, we see better financial performance for MAS, backed by its improved operating statistics and possible turnaround. These prompt us to upgrade our recommendation on MAS to BUY from SELL. We are also revising our valuation model as well as methodology and lifting its FV to RM0.81 premised on 8.5x EV/EBITDAR, or 0.56x of the mean of its 10-year EV/EBITDAR trading band (mean at 15x), which is still at a 20%-30% premium above the industry average. We see this as justified given its potential turnaround and joining the oneworld alliance.
Cheers to oneworld alliance’ tie-up. As MAS has been operating at an average load factor that is below breakeven, it has been struggling operation-wise. However, things could possibly change for the better as MAS joined the oneworld alliance starting 1 Feb 2013. With more passengers fed from other oneworld alliance members, we believe this could possibly help to boost its yield and revenue. Furthermore, being the only ASEAN airline in the oneworld alliance would clearly be a big positive for MAS in that this will lift its load factor. For example, we understand that connecting flights from MAS’ oneworld alliance airlines landing in Bangkok has boosted the load factor of MAS’ flights connecting KL and Bangkok. Furthermore, we see more conversion of loyalty points as more connectivity routes are offered to lure passengers, which would be positive for MAS.
Corporate exercises get clearer. MAS has proposed to reduce the par value of its shares from RM1.00 each to RM0.10 to partially set off its accumulated losses of RM7,863.7m. The company has also proposed to reduce its share premium to set off against those accumulated losses. What is of concern to investors is that MAS is making a rights issue for the third time since Jan 2007. This time, it is proposing to raise RM3.1bn and use the proceeds mainly for: (i) working capital (43%), (ii) capital expenditure (32%) and (iii) repayment of borrowings (25%). MAS will hold its EGM on 5 Mar 2013 to seek shareholder approval on the corporate proposals. The entire proposal will be completed by 1HFY13.
Corporate exercises to prepare for a fresh start. We expect MAS’ efforts to cut its accumulated losses, repay borrowings and spend on expansion, together with its participation in the oneworld alliance to boost its load factor and yield. We see this as a move towards ‘refreshing’ its financial positions and make a new start,. Nevertheless, the long term plan is no doubt positive, although there will be short term pain for investors since the exercise will dilute its earnings by approximately 60%, based on the assumption of 3 Rights Shares for every 2 shares held.
Impact from HSR too far to call. As we highlighted earlier, plans to develop the HSR (High Speed Rail) connecting Kuala Lumpur and Singapore may have negative impact on full service carriers like MAS. However, we are of the view that it may still be too early to gauge the impact as it would be several years before the HSR sees daylight. As such, we are not pricing this in as yet.
Upgrade to BUY; FV revised to RM0.81. We are still cautious on the intensifying competition from MSS’ regional peers, which may affect yield growth, and the potential 60% earnings dilution arising from its proposed rights issue. That said, we see better financial performance for MAS, backed by its improved operating statistics and possible turnaround. These prompt us to upgrade our recommendation on MAS to BUY from SELL. We are also revising our valuation model as well as methodology and lifting its FV to RM0.81 premised on 8.5x EV/EBITDAR, or 0.56x of the mean of its 10-year EV/EBITDAR trading band (mean at 15x), which is still at a 20%-30% premium above the industry average. We see this as justified given its potential turnaround and joining the oneworld alliance.
Source: OSK
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