Highlights

MAS’s flight MH370 (Boeing 777-200) bound for Beijing, has been reported MISSING! since early 8 March 2014. There are 12 MAS crews and 277 passengers on board the flight.

MAS has officially updated that MH370 has not been discovered. Various parties have launched joint-operation to locate MH370.

Comments

Despite the latest development on MH370, we expect minimal expenses to be borne by MAS, while any compensation for the 239 victims would likely be covered by insurance, similar to previous airline accident cases. The aircraft should also be covered by insurance.

However, near term consumer sentiments on MAS safety is likely to be affected by the incident (especially if it is due to pilot or maintenance error), affecting its load factor in the near term. MAS may also need to further sacrifice its yield (offering higher discounted fares) in order to maintain its load active strategy. Hence, we expect tougher challenges ahead for MAS to turnaround its losses.

We do not discount the possibly of changes to MAS top management, given the existing disappointing financial results and the severity of the current incident (this is the second crash incident under the current management after the first incident of MASWing in Kudat Sabah with 3 deaths on Oct 2013).

On share price performance, we expect further sell-down pressure on MAS counter amid the incident in the immediate term, as can be seen from previous examples of other airlines accidents, which fell 9-30% (see next pages).

However, we do not expect the incident to have material impact on the earnings for MAHB (BUY: TP RM9.75) and AirAsia (HOLD: RM2.22).

Risks

• Lower than expected jet fuel price.
• Better than expected turnaround plan resulting in sharp earnings improvement.

Forecasts

Increased FY14-16 losses by 50-120m, after imputing lower yields due to the incident.

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 domestic and international LCCs and FSCs.
• High jet fuel prices and US$ appreciation.

Valuation

We cut target price to RM0.20 (from RM0.25) based on unchanged 7.3x adjusted FY15E EV/EBITDAR.

Source: Hong Leong Investment Bank Research - 10 Mar 2014