Highlights

In the midst of recovering from MH370 incident, MAS has again been hit by another disastrous incident involving MH17 (Boeing 777) bound for Kuala Lumpur from Amsterdam. The civilian plane was reported being shot down by missile in Ukraine airspace. It was carrying 280 passengers and 15 crew members.

Both government of Ukraine and pro-Russian separatists are pointing fingers on each other for the incident.

Comments

Similar to MH370, we expect compensations for the 295 victims in MH17 to be covered by insurance. The aircraft should also be covered by insurance. Hence, minimal direct impact to MAS cash-flows.

With two major incidents within 6 months, consumer sentiments on MAS safety record will be deeply affected, which further hampered its hope to turnaround by 2015. MAS will have a tough road ahead to rebuild its image. At the meantime, MAS will continue its aggressive campaigns i.e. offering higher discounted fares, affecting its cash flows. Furthermore, MAS position in Oneworld Alliance may be affected due to the poor record.

We place heavy concern on the sustainability of MAS cashflows. As at end 1Q14, MAS has RM3.2bn cash in hand with operating cashflow loss of RM350m in 1Q14 alone. With the expected worsening load factor and lower yields for the remaining 2014, we believe MAS may need to raise fresh capital to keep MAS afloat by 2015.

There will be further sell-down pressure on MAS counter amid the incident in the immediate term. Related counter MAHB (BUY: TP RM10.55) will be affected, while AirAsia (HOLD: RM2.22) may be well-received.

Risks

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

Forecasts

Unchanged

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 maintained negative on MAS with unchanged target price of RM0.15 based on 7.5x adjusted FY15 EV/EBITDAR

Source:Hong Leong Investment Bank Research- 18 Jul 2014