Period     1QFY13/3MFY13

Actual vs. Expectations      MAS’ core net loss of RM340m came in below our full year profit expectations of RM570m and consensus net loss of RM15m. The loss was mainly attributed to the lower than expected yields, arising from an increased in competition within the aviation industry (i.e. local, regional and international).

Dividends    No dividend was declared as expected.

Key Results Highlights     QoQ,  the core net loss widened from RM109m to RM340m on the back of a lower revenue of RM3,388m (-7%) coupled with an increase in the total cost excluding fuel to RM2,324m (+8.6%). The increase in the cost was mainly attributable to higher operating costs, i.e. depreciation (+31%), inflight costs (+13%) and handling & landing costs (+8%). The airline also received a RM91m LAD from Airbus for the late delivery of the A380 planes.

YoY,  although the revenue grew 11% from RM3,058m due to the improvement in its load factor by 3.6ppt to 76.6% on the back of an 11% increase in capacity, its core net loss was only reduced marginally by 5% from RM357m to RM340m. This was mainly due to a higher financing cost (+58%), and a compression in the yield from 19.8 sen/RPK to 17.4 sen/RPK arising from the stiff pricing competition as a result of the increase in capacity in the market. Its international average fare per passenger decreased by 6% while for the domestic side, the fare fell 12%.

Outlook    Given likely better loads and cost efficiency with its new aircraft, we believe that MAS is on the right direction and expect its bottom line to improve in FY13. However, the price competition from Malindo and a spike in jet fuel will remain a threat to MAS.

Change to Forecasts     Looking at the stiff competition ahead, we have reduced our FY13-14E earnings by 97% and 17% respectively as we lowered our yield assumptions.

Rating  Downgrade to UNDERPERFORM

Valuation     We have lowered our TP to RM0.37 based on a 10.5x FY14 PER on our newly adjusted FY14 EPS.

Risks    A global recession and a sharp spike in crude oil prices.

Source: Kenanga