- We maintain our HOLD call on MAS at a higher fair value of RM0.34/share (from RM0.33/share previously) as we roll over our valuation to FY14F. Our valuation still pegs MAS at 0.9x PBV, in line with industry.

- MAS reported 2Q13 core net loss of RM113mil (excluding RM68mil unrealised forex loss), bringing its 1H13 core net loss to RM375mil. Our and consensus net loss of RM255mil and RM237mil respectively for FY13F looks achievable. We think MAS can turn in profits in 2H13, which sees seasonally stronger demand.

- MAS managed to register an operating profit of RM8mil in 2Q13 (2Q12: RM102 loss), while net loss narrowed by 30% YoY from RM262mil in 2Q12. However, while loads are at a record high at 80.6% (+6.6ppts YoY), on the back of 29% pax traffic growth, this came at the expense of pricing.

- Yields were down by 14% YoY leading to a RASK contraction of 6% - meaning the load and traffic improvement were more than offset by weaker yields, which does not seem to be improving. SQ in its results release also guided for the weak yield environment to sustain (and saw its yields contract by 3% YoY in its 1Q14 YE March results).

- On the bright side, MAS’ front cabin traffic saw huge improvement (+36% YoY) vs. overall traffic growth of 23%, suggesting customers are responding well to MAS’ premium products from its new fleet. Should this demand sustain, MAS should benefit once underlying yield strength returns. A MAS-specific issue in the past had been its lack of pricing power, in part, due to ageing products and lack of front cabin demand.

- Improved cost management was the key driver of 1H13 earnings improvement. CASK: -9% YoY vs. a RASK contraction of 6% - largely due to a higher composition of new aircraft (65% of fleet vs. 29% in 1H12), which led to: (1) Better fuel efficiency i.e. unit fuel cost: -6% YoY (partly due to -5% YoY spot fuel price), (2) Unit maintenance cost: -16% YoY; (3) Better aircraft utilisation: 11.7 hours/day (1H13) vs. 10.5 hours (1H12). We see this trend continuing as the old leased fleet are gradually returned over FY13-14F and as increased aircraft utilisation improves operating leverage.

- While we are positive on the structural improvements at MAS arising from improved productivity and cost efficiency, valuation on earnings still looks challenging and share price is supported by NTA. At 1x PBV currently, MAS is trading at 11% premium to FSC peers’ average. A developing risk is a weaker MYR which impacts cost negatively (the majority are USD denominated) while <5% of revenue is in USD.

Source: AmeSecurities