Period  3Q13 / 9M13

Actual vs. Expectations  Malaysian Airline System’s (MAS) reported a core net loss of RM836.7m for 9M13, beyond our and consensus loss expectations of RM693.2m and RM558.7m, respectively. This is mainly due to lower-than-expected yields arising from the increased competition in the aviation industry caused by additional capacity in the market.

Dividends  No dividend was declared as expected.

Key Results Highlights  Disappointing 9M13 results, MAS saw its 9M13 core net loss widen from RM664.4m to RM836.7m despite a stronger revenue growth of 12%. The continuous weak performance from MAS was due to the pressure on yield whereby its total yield saw greater decline as compared to the reduction on its costs. Its total yield declined 11.2% from 36.6sen/rpk to 32.5sen/rpk while its CASK was only reduced by 5.1% from 27.9 sen to 26.5 sen.

 QoQ, its 3Q13 core net loss widen by 45% from RM202.6m to RM294.1m was due to higher fuel expenses, which increased 11% to RM1543.0m from RM1389.0m due to higher fuel prices coupled the 4.6% increase in capacity. Consequently, its fuel-CASK saw an increase of 6.2% from 9.6 sen to 10.2 sen. Apart from that, the cost for its advertising and promotion saw a signification increase of 57.6% to RM93m for the quarter as MAS undertook highly aggressive promotional activities to remain relevant in the competitive market.

 YoY, its pax yield (ex-fuel surcharge) declined 15.7%, from 20.5 sen to 17.3 sen due to stiff competition from both domestic and international market due to excess capacity in the market. Its domestic pax yield (ex-fuel surcharge) received the hardest hit from the market competition as its yield declined by 35% to 25.1sen/rpk while it’s international pax yield (ex-fuel surcharge) declined 11% from 18.3sen/rpk to 16.3sen/rpk. That aside, its financing cost also ballooned 180% to RM121.2m due to the financing for additional aircraft. Hence, its core net loss widened by 186% from RM102.9m to RM294.1m.

Outlook  The outlook for MAS remains highly challenging given the stiff competition in the market, especially domestically. Despite management’s continuous effort in reducing its cost structure, we opine that MAS should focus on improving its subsidiary & ancillary business income revenue to as it could help cushion the impact from the declining yield both domestically and internationally.

Change to Forecasts  We increased our core net loss estimates by 21.7% and 15.4% to RM843.8m and RM339.1m for FY13E and FY14E, respectively, as we tweaked our total yield assumption lower by 1.3% from 32.7sen/rpk to 32.3sen/rpk due to stiff competition.

Rating MARKET PERFORM

Valuation  We lowered our Target Price for MAS by 8.6% from RM0.35 to RM0.32 based on an unchanged 6.9x FY14E EV/EBITDAR ratio following the revision in earnings.

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

Source: Kenanga