Results

Below Expectation – 1Q14 core net loss at RM430.3m, which stands at 48.8% of HLIB’s FY14 estimates of RM891m loss and 55.3% of consensus’s RM786m loss.

Deviations

Lower than expected yields.

Dividends

None.

Highlights

1Q14 revenue increased by 4.2% yoy due to +18.5% passenger growth (RPK) but offset by yield declines of 10.3% yoy as well as decline in cargo demand (-0.5% yoy) and cargo yield (-3.2% yoy).

EBITDA margin deteriorated further to -3.1% in 1Q14 (vs. -2.6% in 4Q13 and -1.4% in 1Q13) due to relatively high jet fuel costs. Overall jet fuel cost/RPK was 13.1sen in 1Q14 (vs. 12.2sen in 4Q13 and 13.6sen in 1Q13). Nevertheless, MAS has hedged ~23% of its jet fuel requirement at US$115/bbl vs. average US$128/bbl in 1Q14.

Net gearing worsen to 2.4x in 1Q14 from 2.0x in 4Q13. Adjusted net gearing would be even worse at 5.0x (sukuk recalculated as borrowings). MAS is still exploring various alternatives to finance its scheduled aircraft deliveries in the upcoming quarters.

Despite the impact from MH370, MAS maintained its targeted ASK growth of 10-12% in FY14, focusing on international routes (other than China), through improved asset utilization and more efficient new fleets.

We concur with MAS view on the uphill battle after MH370 incident, which has marred its brand image considerably, while facing stiff competitions from domestic and regional airlines.

We expect larger losses in next quarter given potentially lower yields and load factor, as well as higher operating costs (i.e. marketing, advertising and distribution).

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

Increased FY14 loss to RM1.4bn (from RM891m) and FY15 loss to RM719m (from RM490m) and FY16 loss to RM310m (from 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 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

Reiterate Sell with lower Target Price of RM0.15 (from RM0.20) based on 7.5x adjusted FY15 EV/EBITDAR.

Source: Hong Leong Investment Bank Research - 16 May 2014