- It was reported in the press this morning that MAS is expected to present options for a turnaround to the government this week. This is a lot faster that the earlier indication given of about a year for such a plan to materialise.

- The options are reported to include Khazanah either taking MAS private or allowing MAS to go bankrupt, and then renegotiating contracts with the unions.

- It is not clear how a privatisation can significantly enable MAS’ restructuring versus its present state and whether plans to execute a restructuring could actually be done while MAS is still listed, or even whether a privatisation is in fact a pre-cursor to the bankruptcy path.

- However, from a sector perspective and in hindsight, any possibilities of MAS folding will immediately remove competition in the sector (particularly for domestic routes) and we see AA as a big beneficiary.

- AA has seen its yields and pricing power deteriorate significantly since MAS commenced its offensive last year (see chart 3). This is following MAS’ restructuring plan that involved improving utilisation of assets, which resulted in massive capacity additions into the system. MAS increased capacity by some 17% in FY13 as opposed to an average contraction of 2% per annum in the prior five years (see chart 4).

- As a result, AA’s earnings growth has flattened out, while new asset (mainly aircraft) induction has not sufficiently generated the returns that AA used to generate in the past due to competition. Reflecting this, ROA has deteriorated from a range of 5% to 9% in the past to 2%-3% now (see Chart 1).

- We leave our numbers unchanged for now until there is more clarity on MAS’ restructuring, as this would have some bearing on AA’s near-term earnings prospects.

- Nonetheless, we think market sentiment on AA may start to improve following this development. Maintain HOLD on AA at unchanged FV of RM2.50/share.

Source: AmeSecurities