- The new MAS: Khazanah released MAS’ restructuring plan last Friday. The plans involves a 12-point package of measures (see Exhibit 2) targeted to achieve sustainable profits by end 2017 and a potential relisting within 3-5 years after privatisation i.e. by end 2017 or 2019. MAS’ privatisation is to complete by end 2014, while relevant assets, operations and liabilities will be migrated to a new company by Jul 2015.

- Context of the restructuring plan: Khazanah acknowledges that: (1) MAS’ revenue trails that of full service (FSC) competitors (13% below) vs. a marginal 4% cost advantage, (2) Cost gap to LCCs (42%) is greater than its revenue premium (20%) and (3) Workforce productivity lags competition at only 60%-70% of FSC peers. The new MAS will emphasize on a regional network as well as the price sensitive leisure and short-haul business traveller’s preference for efficiency and convenience rather than a premium product.

- On financial restructuring: Khazanah will inject RM6bil into MAS on a conditional and staggered basis over the next 3 years. Debt holders will have a debt-equity swap option, among other financial restructuring options being looked at. These will see MAS reduce net gearing to 100%-125% from the current 290%.

- On operational restructuring (cost management): Targets include: (1) Bring short-haul cost within 15% of LCCs, at par to i.e. a CASK of 17sen vs. current 21.4sen at par to Middle East FSCs and below those of regional FSCs, (2) Increase seat capacity/aircraft, (3) Moving to smaller aircraft type – we think, more narrowbodies, (4) Retire specific aircraft types – most probably widebodies mainly, (5) Raise utilisation of short haul aircraft (current utilisation of 9-11 hours/day vs. 14 hours for widebodies),  (6) Redesign short haul product and service model, (7) Improve labour productivity, (8) Increase direct sales, (9) Reduce fuel cost.

- On operational restructuring (revenue management): (1) To increase unit revenue by 10%-15%, (2) Unbundling ancillary services – most immediate cash generation opportunity (3) Improved pricing, (4) Cut loss making routes and to only fly profitable routes – currently involves “national service” routes which are loss making.

- Airasia (HOLD, FV: RM2.10/share) may not immediately benefit after all: It seems as if the new MAS is reshaping much into a quasi-LCC model, what more with plans to unbundle services and monetise ancillary services, focus on regional routes and price sensitive travellers. The focus on getting cost down within 15% of LCCs to an estimated 17sen CASK will lower MAS’ cost much closer to current RASK of 16.6sen - MAS’ attempt at profitability hinges a lot more on cost management, which means little likelihood of an immediate recovery in yields, as we had hoped. This is further underpinned by MAS’ continued attempt at increasing aircraft utilisation, maximising seats/aircraft and a move into smaller aircraft type, which means more capacity growth on its regional network, (although total ASK growth will likely moderate from cuts on long-haul capacity).

- No clear winner: There is no clear winner from MAS’ restructuring plan other than AAX (Not Rated), potentially. We think sector yields is reaching a bottom – MAS’ targeted CASK is already close to current RASK, which means it will unlikely be much more aggressive in pricing, but a recovery could be sometime away given continued capacity expansion on regional routes. We do not see much impact from a shareholding shift out of MAS given that institutional shareholders are not big in MAS (PNB is largest with only 1.7% stake), while Airasia is not an index stock.

Source: AmeSecurities