Results

Below Expectation – 4Q13 core net loss at RM423.3m and FY13 loss of RM1.26bn vs. HLIB’s FY13 estimates of RM1.0bn loss and consensus’s RM0.9bn loss.

Deviations

Worse than expected yields and higher unit operational cost.

Dividends

None

Highlights

FY13 revenue increased by 9.5% yoy on 17.3% capacity growth and improved load factor to 81.0% (from FY12’s 74.7%) but slightly offsets by lower yield in FY13 at 23.8sen/pax vs. FY12’s 27.8sen/pax (see figure #3), due to stiff competitions on both international and domestic routes.

Despite management committed to cut operational unit cost, overall operational cost still increased by 9.7% yoy (higher than revenue) in tandem with capacity growth.

Net gearing worsen from 1.5x (3Q13) to 2.0x (4Q13). Adjusted net gearing would be even worse at 3.7x (sukuk recalculated as borrowings).

Management expects to increase capacity ASK by 12% in FY14, focusing on international routes, through improved asset utilization and more efficient new fleets. MAS will take delivery of 20 aircrafts in FY14 and returning 22 aircrafts (majority B734s). MAS will continue to leverage on its Oneworld Alliance memberships.

We remained skeptical on MAS’s turnaround plan, mainly on expected stiff competitions not only between Malaysia airlines (i.e. MAS, AirAsia and Malindo Airways), but also international airlines (i.e. SIA, ThaiAir, Garuda, Lion Air, Middle Eastern Airlines etc). Management concurs that yield will remain depress in FY14 and they hope the company is able to cut cost significant enough to match the worrying yield trend.

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

Fine-tuned our model, increased FY14 loss to RM891m (from RM516m) and FY15 loss to RM490m (from RM124m). We introduce FY16 forecasted loss of RM175m.

Rating

Sell

Positives –

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

Negatives –

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

Valuation

Maintain sell with lower Target Price of RM0.25 (from RM0.27) based on 7.3x adjusted FY15 EV/EBITDAR.

Source: Hong Leong Investment Bank Research - 19 Feb 2014