Period  4Q13 / FY13

Actual vs. Expectations Malaysian Airline System (MAS) reported a core net loss of RM1.2b in FY13. The results are largely below our and consensus expectations as we were only expecting a core net loss of RM843.8 while consensus was looking at RM878.9 loss.

 While its operating revenue of RM14.5b with an overall yield/RPK of 0.32sen (vs. our expectations of RM14.5b and 32.3 sen) was within expectations, its operating cost was higher than expected, arising from higher advertising and promotion, aircraft maintenance and also other fees, i.e. other engineering costs, hire and maintenance of equipment, Enrich programme and also increase in provisions of doubtful debts.

Dividends  No dividend declared as expected due to loss.

Key Results Highlights

FY13 vs. FY12

 In FY13, MAS saw its core net loss continue to widen, from RM773.6m to RM1167.1m as compared to FY12. Although MAS managed to further reduce its operating unit cost per ask (CASK) by another 8% from 27.7 sen to 25.5 sen, its depreciation and financing cost saw an increase of 57% and 134%, respectively, due to the new purchase of aircrafts.

 Subsequently, MAS also continues to see its yield (sen/RPK) pressured domestically and internationally, whereby its domestic (36.3 sen) and international (22.2 sen) yields (inclusive surcharge) declined by 22% and 12%, respectively, due to the fierce competition from the low-cost carriers and also added capacity in the market.

4Q13 vs. 4Q12

 YoY, MAS revenue only inched up by 3% to RM3,782m despite an improvement in its capacity (+19%) and seat factor (4.3ppt) due to further erosion in passenger yield (inclusive surcharge) by 18% from 28.3 sen to 23.2 sen.

 Its operating cost saw a 7% increase in 4Q13 to RM3,953m mainly attributable to higher fuel expenses (+9%), maintenance (+86%), handling & landing charges (+17%), advertising costs (+270%) and other costs (+37%). Given a higher operating cost coupled with a higher depreciation cost (+63%) on the back of its flattish revenue, MAS’ core net loss widened from RM109.2m to RM330.5m.           

4Q13 vs. 3Q13

 QoQ, while its revenue remains flat at RM3,782m, its core net loss widened from RM294.1m to RM330.5m due to higher staff costs (+7%) and also an increase in its inflight costs (+14.5%).

Outlook  The management is targeting another 12% growth on capacity in 2014 and strives to break even. We opine that this is highly unlikely to happen as we expect yield pressures to persist due to additional capacity flooding into the market coupled with intensive competition from the low-cost and regional carriers, unless MAS could further drive its unit cost down and maximise its revenue through ancillary income at the same time.

Change to Forecasts  Following the disappointing FY13 results, we further widen our core net loss projection in FY14 by 65% to a core net loss of RM558.6m, as we raise our operating cost higher by 1.5% in FY14 after factoring in a higher fuel cost in tandem with its capacity increase.

Rating Downgrade to UNDERPERFORM

 We are downgrading MAS to UNDERPERFORM from our previous MARKET PERFORM call, as we believe that the operating environment for MAS remains challenging and the possibility of it achieving breakeven in FY14 as per their earlier target remains slim.

Valuation  Reduced our TP from RM0.32 to RM0.27 following our downgrade in FY14 earnings based on an unchanged 6.9x FY14 EV/EBITDAR.

Risks to Our Call  Better cost control

 Higher ancillary income

Source: Kenanga