We  see  MAS  potentially  reporting  decent  4Q  results,  gauging  from  the airline's improved  operating  statistics.  We  also  believe  its  coming  on  board  the  oneworld alliance  could  also  boost  yield  and  load  factor.  Overall,  its  outlook  is  brightening and we can expect better financial performance from MAS. The group has proposed several  corporate  exercises  to  beef  up  its  financials  to  make a  fresh  start.  Still, we remain cautious on the potential dilution arising from its proposed rights issue. That said, we lift our FV to RM0.81 and upgrade MAS to BUY.
 
4Q outlook positive, with potential upside surprise. MAS reported stronger EBITDA of RM147m  in  3QFY12,  which  helped  to  pare  down  the group's YTD EBITDA loss to RM100m. Moving on to the last quarter of the year, we expect MAS to report results that will  show  positive  EBITDA,  which  should  reverse  its  losses  and  allow  it  to  report  an estimated  FY12  EBITDA  of  RM35.0m.  This  is  on  the  basis  that  the  national airline's operating  statistics  had  improved  substantially  in  the  final  quarter  of  FY12. With  a  record load  factor  achieved  in  December  2012,  we  suspect  that  that  the airline's EBITDA  could trump our implied estimate of RM130m for 4Q.

Operating  stats  on  the  mend.  MAS' overall operating stats improved during  the  last quarter  of  2012,  as  its  overall  average  load  factor  rose  2.4%  q-o-q  and  4.5%  y-o-y  to 75.3%  -  its highest  since 4QFY10.  In  particular,  its average  4Q  load  factor  of  77.3%  was 2.8%  better  q-o-q  and  4.9%  y-o-y,  with  the  81.4%  load  factor  for  December  being  the highest on record since the airline started releasing its operating stats to investors in 2002. The  steep  2.8%  y-o-y  jump  in  passenger  load  factor  to  77.3%  was  due  to  the  additional RPK growth from the international segment amid capacity cuts on its non-profitable routes (ASK  -1.4%  y-o-y).  In  view  of  the  above  developments,  we  believe  that  MAS' yield  and revenue should show  positive  growth  in  its  upcoming  results,  due  anytime  this  week.  For the  full  year,  RPK  and  ASK  dropped  by  6.4%  and  6.1%  y-o-y  due  to  the  route  network restructuring that MAS undertook from Dec 2011 onwards.

High depreciation expenses may dent bottomline. Although we expect positive EBITDA for  the  airline,  its  aggressive  plans  to  renew  its  fleet  may  lead  to  escalating  depreciation expenses,  which  will  consequently  hit its  bottomline.   As  such,  we  are still  forecasting  for MAS' to end up in the red for FY12 and report a core net loss of RM728m. This implies that its core net loss for 4Q may narrow to RM52m, although we think some exceptional gains could potentially lift the bottomline into positive territory. Nevertheless, efforts to renew its aircraft and keep its fleet young are positive over the longer term.
 
Cheers  to  oneworld  alliance' tie-up.  As  MAS  has  been  operating  at  an  average  load factor  that  is  below  breakeven,  it  has  been  struggling  operation-wise.  However,  things could  possibly  change  for  the  better  as  MAS  joined  the  oneworld  alliance  starting  1  Feb 2013.  With  more  passengers  fed  from  other  oneworld  alliance  members,  we  believe  this could  possibly  help  to  boost  its  yield  and  revenue.  Furthermore,  being  the  only  ASEAN airline in the oneworld alliance would clearly be a big positive for MAS in that this will lift its load  factor.  For  example,  we  understand  that  connecting  flights  from  MAS' oneworld alliance airlines landing in Bangkok has boosted the load factor of MAS' flights connecting KL  and  Bangkok.  Furthermore,  we  see  more  conversion  of  loyalty  points  as  more connectivity routes are offered to lure passengers, which would be positive for MAS.
 
Corporate exercises get clearer. MAS has proposed to reduce the par value of its shares from  RM1.00  each  to  RM0.10  to  partially  set  off  its  accumulated  losses  of  RM7,863.7m. The  company  has  also  proposed  to  reduce  its  share  premium  to  set  off  against  those accumulated losses. What  is of concern to investors is that MAS is making a rights issue for the third time since Jan 2007.  This time, it is proposing to raise RM3.1bn and  use the proceeds  mainly  for:  (i)  working  capital  (43%),  (ii)  capital  expenditure  (32%)  and  (iii) repayment of borrowings (25%). MAS will hold its EGM on 5 Mar 2013 to seek shareholder approval on the corporate proposals. The entire proposal will be completed by 1HFY13.

Corporate  exercises  to  prepare  for  a  fresh  start.  We  expect  MAS'  efforts  to  cut  its accumulated  losses,  repay  borrowings  and  spend  on  expansion,  together  with  its participation  in  the  oneworld  alliance  to  boost  its  load  factor  and  yield. We  see  this  as  a move towards 'refreshing' its financial positions and make a new start,. Nevertheless, the long  term  plan  is  no  doubt  positive,  although  there  will  be  short  term  pain  for  investors since the exercise will dilute its earnings by approximately 60%, based on the assumption of 3 Rights Shares for every 2 shares held.

Impact  from  HSR  too  far  to  call.  As  we  highlighted  earlier,  plans  to  develop  the  HSR (High Speed Rail) connecting Kuala Lumpur and Singapore may have negative impact on full service carriers like MAS. However, we are of the view that  it may still be too early to gauge the impact as it would be several years before the HSR sees daylight. As such, we are not pricing this in as yet.

Upgrade  to  BUY;  FV  revised  to  RM0.81.  We  are  still  cautious  on  the  intensifying competition  from  MSS' regional  peers,  which  may  affect  yield  growth,  and  the  potential 60%  earnings  dilution  arising  from  its  proposed  rights  issue.  That  said,  we  see  better financial  performance  for  MAS,  backed  by  its  improved  operating  statistics  and  possible turnaround. These prompt us to upgrade our recommendation on MAS to BUY from SELL. We  are  also  revising  our  valuation  model  as  well  as  methodology  and  lifting  its  FV  to RM0.81 premised on 8.5x EV/EBITDAR, or 0.56x of the mean of its 10-year EV/EBITDAR trading  band  (mean  at  15x),  which  is  still  at  a  20%-30%  premium  above  the  industry average.  We  see  this  as  justified  given  its  potential  turnaround  and  joining  the  oneworld alliance.

Source: OSK