We are upgrading Malaysian Airline System Bhd (MAS) to MARKET PERFORM from UNDERPERFORM with a higher Target Price of RM0.35 based on 6.9x FY14 EV/EBITDAR ratio versus RM0.29 on a 10.5x FY14 PER previously. We reduced our FY13EFY14E estimates to net loss of RM693.2m and RM293.9m (previous forecasts; FY13-14E net profit of RM15.9m -RM467.5m) as we lowered our previously aggressive yield assumptions. Despite our downward revision in earnings, we strongly believe that MAS is on the right recovery path should it is able to maintain its current growth momentum.

A better year ahead. To recap, MAS managed to narrow its 1H13 core net loss from RM561.4m to RM542.6m, underpinned by a stronger revenue growth of 11%. However, we are reducing our FY13E and FY14E earnings estimate to a net loss of RM693.2m and RM293.9m, respectively, as our previous yield assumptions were overly aggressive. However, we believe that given a stronger second half in 2013, MAS would be able to record a better set of results as compared to 2012.

Improving loads, baby steps to recovery. MAS’ year-to-date (August) load factor had seen significant improvement of 6.6 ppt from 73.6% to 80.2%, while its passenger numbers improved 27% as MAS had carried 10.9m number passengers from the previous 8.6m, driven by its aggressive promotional activities for both its domestic and international routes. We believe that MAS’ strategy is in the right direction as it has clearly shown results in winning back its customers.

Passenger loads improved, what’s next? As MAS had successfully achieved one of its goals by getting its planes filled up, we believe that MAS will focus on implementing more structural improvements by enhancing its administration and support services in order to achieve better operating efficiencies which would further bring down its operating costs. The next step would be improving its overall yield; MAS could possibly focus on maximising its profitable ancillary/subsidiary business i.e. insurance, administration fees, security charges, Firefly (which turned profitable in 2012 since it stopped its jet operations) or pass through bulk of its jet fuel costs to passengers through fuel surcharges.

We reduced our FY13E-FY14E estimates to net loss of RM693.2m and RM293.9m (previous forecasts; FY13-14E net profit of RM15.9m -RM467.5m) as we lowered our previously aggressive average yield assumptions of 27.7 sen vs. 25.8 sen. Revenue was higher by 1% as we reflected a better overall load factor of 81%.

Higher TP of RM0.35 (from RM0.29) and we upgrade to MARKET PERFORM from UNDERPERFORM. Although we reduced our earnings due to our previously over aggressive recovery assumptions, we are still encouraged by its recently improved loads amid privatisation media newsflow, we are upgrading MAS to MARKET PERFORM with a higher Target Price of RM0.35 based on 6.9x FY14 EV/EBITDAR ratio (previous, RM0.29 on a 10.5x FY14 PER) inline with AIRASIA. We switched our valuation methodology from PER to EV/EBITDAR to better reflect it’s improving operational performances albeit expecting a longer time-frame for the management to iron out its cost issues before MAS turned profitable. However, now our Target Price carries earnings risks as their bottomline remains volatile.

Source: Kenanga