We maintain our HOLD rating on Malaysia Airlines (MAS) withan unchanged fair value of RM1.25/share, following the release of its 4Q11results. Our valuation continues to peg MAS at 0.9x FY12F book value ofRM1.38/share.

 MAS reported a netloss of RM1.3bil for 4Q11, which brought the full-year net loss to RM2.5bil.The results were dragged by some RM1.09bil provisions comprising: (1) RM602milfor redelivery of aircraft; (2) RM314mil of impairment of freighters (2 B747Fand 4 A330F); (3)RM179mil provision for stock obsolescence. 

Excluding these provisions, MAS would have reported a corenet loss of RM1.3bil, which was in line with our estimate of a RM1.28bil netloss for FY11, but slightly deeper than consensus' projected net loss ofRM1.2bil. 

Management explained that the huge provisions for aircraftre-delivery was due to an accelerated return of 58 aircraft to lessors betweenFY12-14, of which 34 are expected to be returned in 2012. 

Core operating results were poor in 4Q11. The core net lossof RM232mil compares poorly against a RM60mil core net profit in 4Q10. Whileyields rose 9% YoY, the main drag came from a sharp drop in load factor to72.5% (4Q10: 77.4%), reflecting MAS's weak pricing power. Pax traffic droppedsome 6% YoY, while ASK was more or less flattish. 

Operating outlook looks tough in our opinion, as jet fuel priceremains high (currently hovering circa US$135/barrel). Our current projectionsalready assume jet fuel to average at circa US$130/barrel. An every US$1 increasewill reduce earnings by 9%. 

On top of this, we see the risk of a cash call looming. MAS isexpected to take delivery of five A380s this year (we estimate capex of circaRM3.1bil), with the maiden  two deliveriesin 1H12. A tough operating outlook (1Q and 2Q are typically weakest for MAS),coupled with dwindling cash balance of RM1bil, suggests that the group may be requiredto recapitalise to honour aircraft deliveries. Management is looking at severaloptions, including sale of non-core assets and debt-raising, but does not ruleout coming to the market, though equity would be the most expensiveoption. 

From a valuation standpoint, MAS is not cheap, trading at 1xFY12F book value of RM1.38/share, which is at par to more established airlines;Singapore Airlines and Cathay Pacific. We suggest investors switch out of MASinto AirAsia (BUY, FV: RM4.20/share) for exposure to the Malaysian aviationsector.

Source: AmeSecurities