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

Malaysian Airline System Bhd
(Oct 26, RM2.29)
Maintain underperform at RM2.31 with fair value RM1.91: Despite the strong recovery in the global aviation sector, a strong rebound in yields has so far eluded MAS largely due to two key structural issues: (i) its inability to immediately roll out higher-yielding product offerings, predominantly those at the front end, as the delivery of newer aircraft is still pending; and (ii) MAS's main hub, Kuala Lumpur, is not quite a natural market for higher-yielding business travellers.

Based on its existing confirmed aircraft orders with an estimated cost of RM15.6 billion ' 35 planes of the B787-800 range, 17 planes of'' the A330-300/F range and six of the A380-800 model ' MAS does not see the need to make another round of cash calls. However, if the national airline is to exercise its options for an additional 20 B787-800 and 12 A330-300/F planes, with an estimated cost of RM7.8 billion, it does not rule out the possibility of some form of fund-raising exercise down the road.

MAS confirmed news reports that it is considering re-deploying its 37 older-generation B737-400 to its low-cost operation under Firefly. If MAS is to proceed with the plan, the jet services, likely to be branded 'Firefly Jet', will operate out of the LCCT at KLIA, and not SAAS Airport in Subang. We do not find the Firefly Jet model compelling largely because: (i) it is without the very key advantage of Firefly, namely, operating out of a city airport; and (ii) It will be in direct competition with AirAsia.
Our forecasts remain relatively unchanged as they reflect MAS's relatively muted yield outlook over the short term.

Risks to our view include: (i) a stronger-than-expected recovery in MAS's yields; (ii) lower jet fuel costs; and (iii) effective containment of outbreaks of pandemic diseases.

We maintain our 'underperform' call. We believe the airline sector is poised for improved prospects over the medium term in line with the recovery in the global economy. However, we remain cautious on MAS as: (i) it is still saddled with fuel hedges at high prices; (ii) its quarterly operating results remain volatile with losses during the latest two quarters; and (iii) there may be cash calls down the road, assuming MAS is to exercise its options for additional new aircraft. Indicative fair value is relatively unchanged at RM1.91 based on 14 times FY11 EPS, in line with its nearest comparable issue Singapore Airlines Ltd. ' RHB Research Institute Sdn Bhd (Oct 26)


This article appeared in The Edge Financial Daily, October 27, 2010.