Results

In line - Reported core net loss of RM259m in 2Q13 and RM588.9m in 1H13. We deem the result in line with HLIB’s FY13 forecasted loss of RM756m, as we expect improve result in 2H13 on stronger demand seasonality, but behind consensus’s RM218.7m loss.

Deviations

None.

Dividends

None.

Highlights

2Q13 revenue increased only by 11.7% yoy, despite passenger demand growth of 29.3% yoy and cargo demand growth of +6.9% yoy, as effective passenger yields dropped further to historical low of 16.4sen/RPK (see figure #3) and cargo yields dropped to 51.1sen/FTK (see figure #4).

Operating cost increased by 9.8% yoy in tandem with higher capacity, while benefitting from lower jet fuel cost (US$122/bbl in 2Q13 vs. US$132/bbl in 2Q12).

MAS recognized RM94m on Residual Value Sale on PMB’s disposal of aircrafts as well as net gains of RM46m from the writebacks of aircraft overprovision in 2012.

MAS remained focus on active load strategy, in improving load factor (at the expense of yield), while increasing aircraft utilization rate which will lower average unit cost as well as improve brand awareness.

We believe that MAS is moving towards the right direction with strong government support. However, we fear that macro outlook is not in its favour:

1) stiff competition from LCCs (AirAsia, AirAsia X, Malindo) and FSCs (Cathay, SIA, Garuda and Cathay);

2) regional economy slowdown;

3) weakening of MYR against US$, which denominate large part of airlines operational cost – jet fuel, landing and parking, maintenance, lease etc;

4) weak supports from MAS employee union; and

5) high jet fuel cost (hedged only 16% of jet fuel requirement for 2H13 at WTI crude oil price of US$100/bbl).

Risks

World crisis (i.e. war, tourism and epidemic outbreak), prolong surge in jet fuel price and the development of high speed train between Singapore and Pulau Pinang.

Forecasts

We increased FY13 losses by 1.7%; cut FY14 loss by 21.5% and increased FY15 earnings to RM107m (from RM5m) after adjusting for passenger growth, yield pressures, and weakening MYR. Rating

Sell

Positives –

• Business turnaround with new management team.
• Reduced unit operating cost with delivery of new aircrafts.
• Leveraging on Oneworld Alliance network to improve services and connectivity.

Negatives –

• Restructuring plan (BTP) subject to implementation risk.
• Competitive pressure on airfare from LCCs and FSCs.
• High jet fuel prices.

Valuation

Maintain sell with unchanged Target Price of RM0.28 based on 7.7x FY14 adjusted EV/EBITDAR.

Source:Hong Leong Investment Bank Research - 21 Aug 2013