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

Malaysian Airline System Bhd (MAS)
(Dec 13, RM2.02)
Maintain hold at RM2.01 with revised target price of RM1.85 (from RM1.90): We cut FY11-12F earnings by 3%-6% after imputing lower passenger yields and higher interest expense, which more than offset the impact of the weaker US dollar and lower level of fuel requirement hedged. We expect MAS to turn around next year driven by year-on-year (y-o-y) yield improvement as market conditions improve, while the US dollar is expected to continue to weaken against the ringgit. But MAS' expansion in the low-cost segment could start a price war between low-cost carriers and pressure yields.

We understand MAS is looking to own the first five B738-800s and all six A380-800s that it had ordered. These are scheduled to be delivered between 4QFY10F and FY12F, and likely to be funded by borrowings. Hence, we project net gearing to rise to 1.5 times in FY11F and peak in FY12F at 2.3 times. We understand that it has secured funding for all aircraft to be delivered in FY11.

Maintain hold with a revised target price of RM1.85 pegged to 15 times CY11F EPS. Though we expect MAS to turn around next year, we note that its expansion into the domestic and regional low-cost segment might create downside risk to yields. Furthermore, MAS' net gearing level is expected to rise over the next two years as some of the new aircraft would be owned by the group. This makes it crucial for MAS to deliver consistent earnings to meet its future capital and debt commitments. ' HwangDBS Vickers Research, Dec 13


This article appeared in The Edge Financial Daily, December 14, 2010.