Journey to Wealth
Malaysian Airline - Holding tight to the lifeline Hold
- We maintain our HOLD rating on Malaysia Airlines (MAS) at unchanged fair value of RM1.25/share following the release of its 1Q12 results. Our valuation continues to peg MAS at 0.9x FY12F book value of RM1.38/share.
- MAS reported a core net loss of RM348mil for its 1Q12, excluding net gains on derivatives and forex of RM176mil. We consider the results within expectation as loadstypically swing strongly in 2H of the year, which is typically when the bulk of profit is generated.
- We were positively surprised that despite higher jet fuel price (+10% YoY), MAS' core losses actually narrowed by 9%. Yields were up by some 12% YoY, driving RASK higher by 8% YoY, despite a deterioration in load factor (-4% YoY).
- The significant improvement in yields was driven in part by improvement in front cabin loads and capacity cuts (-8% YoY). Though this was driven by fare discounting to a certain extent, front cabin fares are a lot higher than that of economy class ' impact is still a net positive for systemwide yields. Management is also reviewing contracts with suppliers e.g. catering, though numbers are currently not forthcoming.
- We are concerned however, that competitors are reacting by also discounting fares given weak underlying demand currently. Recent indication by Singapore Airlines is that it will continue to be yield active to drive pax traffic. Cathay had also guided for weak pax traffic outlook, citing possible capacity cuts in the near-term.
- A positive announcement that came out yesterday were proposals to undertake funding, split into 3 main categories: (1) A RM2.5bil Sukuk with a perpetual life which will be treated as equity capital; (2) RM5.3bil finance lease aircraft funding via an SPV to be owned by MoF ' specific for six new A380s and two A330 deliveries; (3) Commercial funding for remaining aircraft deliveries. All these are to be finalised within the next 2-3 months.
- The funding addresses risks of a cash call that we highlighted previously and we see this as positive news. We estimate the new funding will increase interest cost by RM300mil-RM390mil/annum (at 4%-5% interest cost) though this has been partly factored into our projections as aircraft funding.
- MAS's shares have retraced by 26% since early this year and valuations now look a lot more attractive at 0.7x FY12F PBV. However, we remain conservative for the time being given a tough operating environment (which could see underlying sector valuation deteriorate) and pending execution of funding and cost restructuring plans.
Source: AmeSecurities
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This book is the result of the author's many years of experience and observation throughout his 26 years in the stockbroking industry. It was written for general public to learn to invest based on facts and not on fantasies or hearsay....
