Results

Within Expectation – Reported 2Q14 core net loss at RM380.9m, taking 1H14 losses to RM750.4m , which stands at 58.6% of HLIB’s FY14 estimates of RM1.4bn loss and 60.9% of consensus’s RM1.2bn loss.

Deviations

None.

Dividends

None.

Highlights

2Q14 revenue dropped further by 5.5% qoq and 7.2% yoy mainly on declined passenger demand (RPK -4.7% qoq; - 0.3% yoy) and yield deterioration (Yield/RPK -2.6% qoq; - 4.3% yoy) due to after effect of MH370 incidents on air travel demand (especially from China).

Nevertheless, EBITDA margin improved 1.0%-pt QoQ to -2.4% on strong cost control initiatives especially on ground handlings and commissions.

Due to continued losses, net gearing worsen to 2.9x in 2Q14 from 2.4x in 1Q14. Adjusted net gearing would be even worse at 6.3x (Sukuk recalculated as borrowings).

YTD (July), MAS capacity has increased by 12.0% (driven by domestic sector), in-line with management guidance on 10-12% in FY14, through improved asset utilization and more efficient new fleets. However, we believe that the capacity growth plan will be reviewed under the upcoming restructuring program.

MAS is facing uphill battle after MH370 incident in March and MH17 incident in July, which has marred its image considerably, while facing stiff competitions from domestic and regional airlines.

We expect continued losses in 2H14 given the depressed yields and passenger demand environment, as well as high operational 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

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

Maintain sell with unchanged Target Price of RM0.27 based the offered buyout price by Khazanah. Accept Khazanah’s offer

Source: Hong Leong Investment Bank Research - 29 Aug 2014