-  We maintain our HOLD call on MAS at unchanged ex-rights fair value of RM0.33/share after the release of weak 1Q13 results.

-  MAS reported a core net loss of RM262mil (excluding unrealised forex loss of RM21mil and fair value gain on derivatives of RM4mil). This is broadly within our expectation (vs. our FY13F net loss of RM255mil) and deeply below consensus’ FY13F net loss of just RM14mil.

-  On the bright side, MAS halved its operating loss YoY, though net loss only narrowed by 25% as finance cost increased 123% YoY from the delivery of new aircraft.

-  Despite an 11% YoY increase in capacity, traffic improved by 16%, leading to a 5% YoY load factor improvement to 76.6%. However, RASK fell by 0.4% YoY – load improvement was insufficient to offset the decline in yields in 1Q13.

-  MAS is facing yield pressure and management intends to focus on loads instead. Group is targeting 80%-85% load factor (mainly driven by international loads as domestic loads are targeted at 75%), but this may come at the expense of yields.

-  On the bright side, this is the 3rd consecutive quarter that MAS has achieved positive operating cash flow. 1Q13 OpCF improved by 123% QoQ to RM147mil. The recent rights issue which will raise RM3.1bil will further reinforce MAS’ balance sheet.

-  However, yield environment has turned extremely negative. MAS’ key markets i.e. Asia Pacific industry average fares fell 8% in the past 3 months, while Asia-ANZ (Australia & New Zealand) average fares fell 7% in the same period.

-  Management sees the current depressed yield trends sustaining throughout FY13F. We maintain our projection of a net loss of RM255mil for FY13F, which is some 18-fold below consensus estimates of RM14mil net loss. We expect massive downward earnings revisions by the market today.

-  Positively, cost is being managed down progressively via: (1) Increased fleet utilisation; (2) increased staff utilisation; (3) Better fuel efficiency and lower maintenance cost from new fleet. 1Q13 CASK showed a 2.3% YoY decline (partly due to lower jet fuel price), while CASK ex-fuel reduced by 1% YoY.

-  While we are mildly positive on its restructuring, a deteriorating core operating environment will dampen MAS’ earnings turnaround. At 1.2x PBV, MAS is trading at 20% premium to sector average valuation.

Source: AmeSecurities