News    Following MAS’s proposed cash call exercise dated back in Nov-12, MAS has finally concluded its issue price for its proposed rights issue at RM0.23 per rights share on the basis of 4 rights shares for every 1 share.

Comments     The exercise will result in the issuance of up to 13.4b rights shares and is expected to raise gross proceeds of up to RM3.1b and a minimum of 9.3b rights shares would be taken up based on Khazanah Nasional Berhad’s full entitlement to the rights shares which would raise minimal gross proceeds of RM2.1b.

As highlighted earlier in our previous report, the major chunk of the proceeds would be utilised for working capital purposes (43%), followed by CAPEX spending (32%) and the repayment of borrowings (25%). The repayment of the existing borrowings will save up to RM39m of its financing cost while the capex is mainly for the progressive payments for its new aircraft orders for the next two years, i.e. 17 units of B738 and 5 units of A330.

Outlook      We would continue to see MAS enjoy better loads and cost efficiency with its new aircraft line up and route cuts which we expect will help support its FY13-14 bottom-lines. However, going forward, it would still be challenging for MAS as the intensified competition between the low-cost carriers due to the entry of Malindo might further put pressure on MAS’s pricing strategy and a spike in jet fuel will remain as the main threat for MAS.

Forecast     No changes to our FY13-14E forecasts.

Rating     Maintain MARKET PERFORM

We are maintaining our MARKET PERFORM rating despite an 11% capital upside to our ex-rights Target Price (“TP”) of RM0.39 given a challenging outlook ahead for the sector due to intensified competition.

Valuation     Based on the latest terms of rights issuance, our ex-rights TP is pegged at RM0.39 (or RM1.01 on cum basis) based on 9x FY14E fully diluted EPS of 4.3sen (vs. our previous ex-rights TP of RM0.77 or cum-rights TP of RM0.83. Note that our previous TP was derived based on a different scenario with assumptions of 3 for 2 rights issuance at an issue price of RM0.60 per rights share).

Risks      Global recession and a sharp spike in crude oil prices.

Source: Kenanga