- We maintain our SELL call on MAS following the release of its weak 4Q13 results. Our fair value is lowered to RM0.27/share (from RM0.28/share previously) given the earnings cuts in this report. Despite being a seasonally stronger quarter, MAS reported 4Q13 core net loss of RM330mil (vs. RM294mil in 3Q13), which brought its full year 2013 core net loss to RM1bil. This is deeper than our FY13F net loss of RM824mil and consensus’ RM890mil.

- 4Q13 pax load factor moderated by 4% QoQ (+5.5% YoY), which came as a negative surprise as 4Q is typically the strongest. The weakness came from the international segment (-5% YoY) while domestic segment improved by 2% QoQ.

- Yields were higher by 3% QoQ (but -16% YoY) vs. 3Q13’s -16% YoY. Overall FY13 pax yields fell by 13%. Although FY13’s absolute pax revenue was 9% higher YoY (See Table 1&2, RASK (i.e. unit revenue) actually fell by 6% compared to CASK’s (i.e. unit cost) decline of 4%.

- We revise FY14F-15F earnings downwards by 38%-48%; our forecast now assumes flattish yields, and 11%-12% ASK increase this year. Any worse-than-expected yield outcome will result in further downgrades.

- Another key surprise was the larger-than-expected capacity increase target in FY14 (+12% vs. industry: +5%), albeit this was more moderate than FY13’s +17%. Positively, the 12% ASK increase (FY14F) will come from further improvement in aircraft utilisation, from an average 10 hours in FY13 to 11hours 10 minutes in FY14, on our estimates. This reflects full-year impact of fleet utilisation improvement efforts in FY13. There will be a net reduction of 2 aircraft in FY14 vs. a net increase of 5 in FY13.

- Management’s focus is on expanding capacity to reduce unit cost and maximise absolute revenue, rather than improving yields; at best, management expects to maintain yields this year. Additionally, management preferred not to commit if it is still sticking to its target of returning to the black in FY14.

- The incremental FY14 capacity increase will be mainly channelled towards the international segment; we are cautious about this as the segment has shown tremendous signs of weakness in 4Q13, which led to MAS’ load deterioration in the period (See Table 2). In contrast, FY13’s 17% capacity increase was more evenly distributed (domestic: +20%, international: +17%).

- MAS is still in the process of thinning out its unit cost via capacity expansion and unfortunately, this comes in a period of weak yield environment, leading to no improvement to bottomline. Growth in cash has been entirely supported by incremental borrowings and gearing now stands at 1.9x (rising to 2.3x in FY14F). Maintain SELL.

Source: AmeSecurities