Results

Below - Reported disappointing core net loss of RM235.6m in 3Q13 and RM839.3m in 9M13 as compared to HLIB FY13E loss of RM768.7m and consensus RM505.4m.

Deviations

Lower than expected yields and higher than expected operating costs structure.

Dividends

None.

Highlights

3Q13 revenue increased only by +13.2% yoy, despite passenger demand – RPK increased by +37.1% yoy and cargo demand – FTK increased by +4.1% yoy, indicating yields compressions (See Figure #3-4).

Management guided intense competition in domestic and Asian market given the substantial increase in capacity into the system. Management painted grey outlook into FY14, with yields expected to remain depressed as forwarned by HLIB since early of the year.

Operating cost increased by +14.5% yoy (faster than revenue growth), mainly on higher fuel cost – higher average jet fuel price and US$ appreciation (See Figure #4-5). Ex-fuel, operating cost increased by +13.5% yoy.

While management noted on the bad results, they remain committed to increase MAS fleet utilization rate, replace new aircrafts, and lower unit operational cost (improve efficiency). The yield environment is already hard to gage, this combined with the hard to quantify potential cost savings will continue to mask the future of MAS.

Reiterating our fear, the macro outlook is not in MAS favour:

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

2) weakening of MYR against US$ (we expect RM/US$ to remain lackluster in FY14), which denominate large part of airlines operational cost – jet fuel, landing and parking, maintenance, lease etc;

3) continued high jet fuel cost environment (jet fuel price has been hovering at US$125/bbl level, and we do not expect jet fuel price to trend down below 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 the losses for FY13-14 to RM1,018m and RM764m (from RM769m and RM327m) and expect losses of RM190m for FY15 (from profit of RM107m).

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 lower Target Price of RM0.25 (from RM0.28) based on 9.5x FY14 adjusted EV/EBITDAR.

Source: Hong Leong Investment Bank Research - 19 Nov 2013