MAS  posted  better  profits  in  line  with  our  and  consensus  projections,  swinging back to EBITDA of RM147m for 3Q vs a RM859m loss in 3QFY11. However, yields were  toppish  while  cost  per  unit  did  not  budge  as  the  airline  operated  below  its breakeven load factor.  Our earnings estimates for FY12 and FY14 are unchanged but we see MAS facing a mounting challenge to cut costs near term. This prompts us to lift our core loss estimate by 15% for FY13. And now, it's d''j'' vu in the case of MAS' third cash call since 2007 '  now  to  raise  RM3bn  -  which  will  potentially enlarge  its  share  base  by  60%.  Ex-rights,  we  lower  the  FV  and  downgrade  MAS back to a SELL, at RM0.52 FV.   

Encouraging  results.  MAS  reported  a  3QFY12  core  net  loss  of  RM63m  vs  losses  of RM206m  and  RM247m  in  2QFY12  and  3QFY11  respectively.  YTD  the  core  loss  of RM675.2m appears on track to hit our full-year loss estimate of RM775m, which is in line with  our  and  consensus  estimates.  However,  despite  its  bottomline  being  in  the  red owing to high depreciation and interest costs, MAS' 3Q12 EBITDA was positive at RM147m vs a loss of RM859m in 3QFY11, easing the group's YTD EBITDA loss to RM100m. With a quarter more to go, MAS is on track  to reverse to profitability with an estimated FY12 EBITDA at a positive RM34.3m.

Yields  may  be  toppish.  MAS' yields for 9MFY12 measured in revenue  per  RPK (revenue passenger kilometer) hit 27.6 sen, higher by only 7% YTD, 1% q-o-q and 2% y-o-y. This was lower than we had earlier anticipated, which suggests that yields could be peaking  in  view  of  the  stiff  competition  from  low  cost  carriers  and  other  foreign  full service carriers in the international segment. The 7% YTD yield boost was attributed to the  domestic  operation,  which  grew  by  only  6%  YTD,  suggesting  that  yields  from  its international operations barely grew. However, with its spanking new aircraft coming in, yields  from  the  international  segment  may  improve  moving  forward  although  we  are  of the  view  that  yield  on  the  domestic  side  appears  to  have  peaked  given  the  upcoming competition from Malindo, as well as AirAsia's aggressive fleet expansion.
 
Costs stubbornly high. The airline division's per unit capacity cost as measured in cost per ASK (available service kilometer) of 24.9 sen barely budged y-o-y as the lower fuel cost  per  unit  was  offset  by  higher  non-fuel  expense  per  unit.  Although  overall  costs cost  was  flat,  the  higher  yields  fetched boosted MAS' breakeven load factor from 95% to 89%. As long this  number  remains above  the  current  load  factor  of  74.5%,  MAS  would  be  unable  to  break  even operationally.

Outlook  improving.    MAS' outlook  remains  challenging  as  competition  intensifies  while  at  the same time it is unable to bring costs down drastically. Staff costs are not in for any cuts in the near term as Management has clearly stated that any reduction in workforce would be through normal attrition. Nonetheless, we continue to bank on its upcoming new aircraft, which may help to boost aircraft utilization, and reduce fuel burn and maintenance charges to bolster its bottomline.

Aircraft  deliveries  and  yield  outlook.  According  to  MAS' last  delivery  guidance  two  quarters ago, 23 aircraft are to be delivered in 2012 (of which 5 are A380s) while 34 will be returned to their lessor,  resulting  in  an  8%  drop  in  capacity  YTD.  According  to  media  reports,  the  aircraft  to  be delivered  next  year  are  six  A380s  and  two  A330s,  although  this  could  be  offset  as  the  airline surrenders more leased aircraft. Our assumptions assume a 5% capacity growth for FY12 on the back of 1% growth in yield, with the decline in yields from the domestic side being offset by better yields from the international segment.

More  dilution,  once  again.  As  we  had  cautioned  earlier,  MAS  finally  announced  a  rights  issue given  its  high  cash  burn  rate  and  need  to  fund  its  aircraft  acquisitions.  This  will  be  the airline's third  cash  call  after  Jan  2007  when  it  raised  RM1.2bn  and  in  Dec  2009,  from  which  it  raised RM2.7bn.  To  fund  its  working  capital  and  capex  in  the  near  term,  MAS  will  be  drawing  down RM3.4bn this quarter from the recent SPV set up by the Ministry of Finance (with a total financing facility  of  RM5.3bn).  The  proposed  rights  issue  could  potentially  raise  as  much  as  RM3.1bn  for working capital, capex and the repayment of borrowings, as shown in Figure 1 below. The price of the rights shares has yet to be finalized but in order to raise RM3.1bn, an illustrative price would be  RM0.60  per  rights  share.  This  may  see  MAS'  share  base  bloating  from  3,342.16m  to 8,355.39m  shares,  based  on  an  entitlement  of  3  Rights  Shares  for  every  2  shares  held.  The discount  to  its  theoretical  ex-rights  price  (TEAP)  is  21%  on  its  5-day  VWAP,  which  would consequently dilute the stock's EPS by 60%. Prior to facilitating the upcoming rights issue, MAS will  be  undergoing  a  Proposed  Capital  Restructuring,  which  will  see  its  par  value  shrinking  from RM1  to  10  sen,  as  well  as  a  reduction  in  its  share  premium  account  to  reduce  its  accumulated losses. 

Who will subscribe for the rights shares? MAS has obtained an irrevocable and unconditional letter  of  undertaking  from  its  major  shareholder,  Khazanah  Nasional  Bhd  (who  owns  69%  of  its shares),  to  subscribe  in  full  for  its  entitlement  of  the  Rights  Shares.  Assuming  an  issue  price  of RM0.60  per  share,  the  discount  of  21%  to  its  TEAP  does  not  look  attractive  at  all. The airline's rights  issue in 2007  and 2009  were  priced at 40%  and  32%  discounts  respectively,  with  the  last one being over-subscribed by 7.67%. This time around, there is a high risk that the discount could be even steeper as many investors  are already weary of  MAS' many cash calls. On the positive side, the proposed rights issue will boost MAS' current net gearing of 3.1x to just under 2x, hence allowing it to take on more borrowings.

Lowering  estimates  on  bleak  prospects.  Our  earnings  estimates  for  FY12  and  FY14  are unchanged  but  in  the  near  term,  we  see  MAS  facing  a  mounting  challenge  to  slash  costs.  This compels us to lift its estimated core losses by  15% to RM80.7m from RM70m for FY13. We are also  projecting  for  MAS'  earnings  to  hit  RM473m  by  FY14m,  although  we  caution  that  a sustainable  improvement  in  profits  is  currently  not  visible.  Although  premature,  we  are incorporating the Rights Issue into our earnings projections, as the exercise will dilute the EPS per share by 60%.

Downgrade to SELL. The announced Rights Issue took us by surprise as we had not  expected MAS  to resort to such a desperate move, this being the national airline's third cash  call  since 2007. MAS is still unable to generate sustainable profits even on a q-o-q basis. As a result of the potential dilution, our new FV - premised on higher 8x FY14 EV/EBITDA - is now lower at 52 sen. Hence,  we  downgrade  MAS  to  a  SELL  from  a  BUY.  Our  previous  RM1.38  FV  was  premised  on 7.5x  FY14  EV/EBITDA.  At  the  current  share  price,  MAS  still  looks  expensive  across  all  metrics even if the earnings outlook is now more positive.

Source: OSK