Period     2Q13 / 1H13

Actual vs. Expectations   Malaysian Airline System’s (“MAS”) recorded core net loss of RM542.6m in 1H13 after stripping off the RM91m gain from the RVS with PMB, which came in below our full year profit expectations of RM15.9m and consensus net loss expectations of RM218m. This is mainly due to lower than expected yields arising from increased competition in the aviation industry coupled with a seasonally slower 2Q.

Dividends    No dividend was declared as expected.

Key Results Highlights   In 1H13, MAS core net loss narrowed from RM561.4m to RM542.6m underpinned by a stronger revenue growth of 11%. The increase in revenue was mainly due to better operating performance recorded by MAS in 1H13 as a result of its aggressive marketing strategy. It has recorded an impressive 5.1ppt increase in load factor to 78.6% despite a 15% increase in capacity ASK to 27,756m km. 

QoQ,  its 2Q13 core net loss narrowed by 40% from RM340.0m to RM202.6m despite being the weakest quarter seasonally as MAS continues to bring down its costs. Its fixed cost ex-fuel/ASK was down by 5.2% to 16.2 sen underpinned by its staff cost/ASK which was lower by 12% to 3.8 sen coupled with the lower fuel cost/ASK which saw a decrease of 7% to 9.6sen.

YoY,  Although its revenue grew 12% from RM3,594.3m due to the improvement on its load factors of 80.4% (+6.5ppt) on the back of 19% increase in capacity, its core net loss only reduced marginally by 1% from RM204.9m to RM202.6m.  This is mainly due to a higher financing cost (+95%) as a result of additional aircrafts, and a compression in yield from 20.4 sen/RPK to 16.4 sen/RPK (-19%) arising from the stiff pricing competition due to industry capacity increase. Its international average fare inclusive of surcharge per passenger decreased by 14% while the domestic fare decreased 21%.

Outlook    Given better loads and cost efficiency with its new aircraft, we believe that MAS is on the right track and expect its bottom line to improve marginally in FY13. However, the price competition from the regional players and a spike in jet fuel coupled with the increased volatility in currency might dampen MAS’ turnaround plan.

Change to Forecasts   No changes at this juncture.

Rating  UNDER REVIEW

Valuation    Our Call and TP for MAS is now under review, as we would like to seek more clarity from the management on its turnaround strategy. Our previous call and TP for is UNDERPERFORM and RM0.29.

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

Source: Kenanga