Period   2Q12/1H12

2Q12 core net loss of RM205m was within expectations. 1H12 core net loss of RM561m already made up 45% of our FY12E core net loss forecast of RM1.2b but exceeded consensus's estimates of RM522m.

Dividends  No dividend declared, as expected. 

1H12 core net loss of RM561m was a 32% improvement vs. 1H11 core net loss of RM824m, due to reduction of fuel cost by 10% and other operating cost by 5%. MAS have also recorded RM39m derivative loss and RM81m of exceptional gain in 1H12 (Airbus compensation of RM45m in 2Q12). 

QoQ, 2Q12 core net loss reduced to RM205m from RM356m on the back of yield improvement which was mainly supported by higher fuel surcharge during the period (+26%). The management has indicated that it will continue to impose fuel surcharges on the back of up-trending crude oil prices in 2H12.  

YoY, 2Q12 revenue slid 6% while core net loss narrowed by 56% due to route rationalisation which saw 12% reduction in capacity and operating cost.

Outlook  There is still a lot of uncertainties, albeit the improved 2Q12 which saw narrower losses. 3Q12 will be challenging for MAS as 3Qs are seasonally weak quarters for airlines, coupled with volatile crude oil prices. MAS hedged 15% and 35% of its 3Q12 and 4Q12 fuel consumption at USD103 per barrel. However, with crack costs trending upwards, we expect FY12E fuel cost to eventually increase to a range of USD125 to USD RM135/barrel. 

No change in our FY12-13E earnings. Key drivers to see narrower losses are yield improvement and further austerity measures. 

Rating  Maintain UNDERPERFORM

We are maintaining UNDERPERFORM rating on MAS with. Although financial performance appears to be improving, there are too many unknown quantities including largely anticipated volatile fuel environment. 

Valuation   Higher Target Price of RM1.06 (RM1.02 previously) as we roll-over our valuations to FY13E using 8x EV/EBITDA (previously 2.5x PBV) as we expect MAS to record operating profits in FY13. 

Risks  Global recession and sharp spike in crude oil price.