Stock Name: MAS
Company Name: MALAYSIAN AIRLINE SYSTEM BHD
Research House: CIMB

KUALA LUMPUR: CIMB Research is maintaining its Outperform recommendation on MALAYSIAN AIRLINE SYSTEM BHD [] (MAS) with a RM3 target price despite the disappointing 2Q ended June 30, 2010

It said on Tuesday, Aug 17 that in 2Q, MAS suffered a core net loss of RM465 million, which took cumulative losses to 67% of its full-year forecast of RM1 billion loss.

'Although the 2Q loss was 42% lower year-on-year, it was more than double 1Q's loss which surprised us as we had anticipated a sequential reduction in losses. The culprits were catch-up maintenance and other lumpy provisions which more than offset higher cargo profits and the recovering passenger topline,' it said.

CIMB Research said as a result of these provisions, it cut its FY10-11 EPS by 10%-14% but retain its FY12 estimate.

'We also maintain our target price of RM3, pegged to an unchanged 6x CY12 core EPS. The stock remains an OUTPERFORM given the potential catalysts of a global yield recovery and a structural cost reduction from FY11 onwards. Investors should accumulate on any price weakness,' it said.

CIMB Research said MAS reported a net loss of RM535 million in 2Q mainly due to the RM217 million marked-to-market (MTM) losses as spot/forward oil prices dropped between March 31 and June 30, 2010, in contrast to the RM1.3 billion MTM gains posted last year when oil prices rose in 2Q09.

'What's behind the higher costs in 2Q? We were taken by surprise by the quarter-on-quarter cost increase of almost RM500 million, ahead of the RM250 million on-quarter revenue rise. The main component was the catch-up provision for maintenance of 18 leased aircraft which MAS intends to return to the lessor.

'MAS had underprovided for costs as spare parts and labour charges have since increased. Given that a further 13 leased aircraft may be similarly returned, another catch-up provision is likely in 2011. We have imputed this into our revised forecasts,' it said.

CIMB Research said MAS did very well in cargo, with 2Q revenue rising 73% on-year on the back of a 44% increase in demand and 21% rise in cargo yield. Cargo profits almost doubled on-quarter to RM49 million and turned around from the RM48 million loss last year.

It added that passenger yield anaemic so far. 2Q pax revenue only rose 15% on-year, with revenue per km demand up 18% on-year but pax yield still 2.2% lower on-yea. Over the past three quarters, MAS's pax yield has barely budged from its lows whereas SIA's yield has recovered a cumulative 19% due to its higher business mix.

'MAS will make yield recovery a more urgent task for 2H. It underperformance vis-''-vis SIA is not unexpected and does not dampen our enthusiasm for the fleet renewal story,' it said.