Capacity and cost cuts proven successful. MAS 1QFY12 core loss of RM141m represents a sharp contraction of 65% q-o-q and 72% y-o-y (1H down by 38% y-o-y) as expenses came down by 4% and 16% respectively. Its earnings were in line with our projections but below consensus'. For the quarter, there was a total of RM208m in net non-recurring expenses, whereby the fair value movements of its derivative and forex instruments mitigated by the RM45m in compensation from Airbus for the late delivery of its A380s. The improved bottomline was due to its 12% capacity cuts, notably from its non profitable routes, which improved overall aircraft utilization and yields. MAS passenger yields were up by 9% YTD although cargo yields were lower by 1% due to the tough economic environment. The improvement on MAS' unit revenue and costs resulted in a sharp drop in its overall breakeven load factor by 6ppts YTD to 94%.

Earnings inline; seeing a better 2H. MAS' EBITDA came in at RM46m in Q2, its first positive EBITDA since the RM257m registered in 4QFY10. This is positive in boosting investor confidence as its turnaround story gains traction. With its YTD EBITDA loss at only RM182m so far and in anticipation of a stronger load and yields in the 2H, we see MAS possibly chalking an EBITDA of RM34m for this year.  Load factor has notched lower by 2ppts to 73.4% YTD due to a challenging outlook. Nonetheless we remain positive as earnings will be driven by cost cuts and higher yields after rationalizing its routes. Going forward, the arrival of its new aircrafts will also reduce fuel burn. We have yet to see this since its fuel burn on per unit load tonnage KM still nudged higher by 10% q-o-q in 2Q due to the ongoing route rationalization. For the 1H, MAS has successfully trimmed costs across all levels (ex fuel costs down 10% YTD), notably on its sales commissions and from maintenance and handling as man hour costs improves. Management reminded that there is still room for cost cuts as aircraft utilization improves further with the bigger capacity aircrafts coming in.

Turning more positive. Upgrade to BUY.  Aswe are feeling more positive about MAS' turnaround story, we are upgrading the stock to BUY (from TRADING BUY) with our FV unchanged at RM1.38, premised at 7.5x FY14 EV/EBITDA. Our call is a non consensus buy call since May. While there is still a lot more that needs to be done to bring in consistent profits, we see sentiment turning more positive for the counter as the carrier undergoes a turnaround, slowly but steadily.

Source: OSK