Highlights

• Our latest meet-up with the management has further shed light on the developments of the company, since the NCA with MAS came into effect 1st September 2015.

• Management guided that the group’s performance was by and large in tandem with all aviation and aviation related company’s performance in 2Q15.

• The negative PATAMI of RM3.94m reported in 1HF15 stems from the concessions granted to MAS to lower their meals cost prior to the NCA, the 25% discount given to MAS as part of MAS’s 12 point recovery plan, was effective from 4Q14 until September 1st when the NCA commenced.

• In-Flight catering: Meal pricing under the new NCA, is lower than the “OCA” as expected, by circa 30%. Cabin handling charges have also been revised lower by circa 17%.

• Management guided that meal volumes in Jan-Jul 2015 which averaged 944k meals monthly was not significantly off from their 2013 meals average of 956k meals/month (best performing year). However, we are more concerned about meal volumes in 2H15 as this would reflect MAS’s ongoing route restructuring.

• In terms of costs: moving forward, management has guided that they are targeting to reduce overheads/fixed cost by circa 20%. They have also, over last 6 months, reduced their materials costs from suppliers.

• Makkah and Australia ventures are still in the pipeline, however management did concede that their priorities have been assigned to the domestic situation, as such, these venture has been pushed into FY16-17.

• Management has given strong assurances that they are on the prowl for opportunities; the group is exploring various options to revive the business which could include finding a strategic partner. We do not discount any asset injections by their private entity or potential M&A activity to turn around the group.

Risks

• Pandemic outbreaks
• Slowdown in passenger movements
• Termination of concession agreements
• Relatively elastic demand

Forecasts

• We make changes to our forecast to take into account the new pricing regime under the “NCA”. FY15-16 EPS lowered by 39-62%.

Rating

BUY

Positives

• (1) Niche industry; and (2) Halal certificate.

Negatives

• (1) Earnings highly dependable on economic conditions/pandemics; (2) Delay in Makkah venture; and (3) Additional borrowings for any asset injections could increase net gearing significantly.

Valuation

• Maintain BUY with lower TP of RM0.77 based on 0.75x Book Value. We are changing our valuation methodology to P/B in order to better reflect embedded asset value amid cloudy earnings outlook.

Source: Hong Leong Investment Bank Research - 14 Sep 2015