Period  1Q14/3M14

Actual vs. Expectations  Malaysian Airline System (MAS) released its 1Q14 results yesterday, registering a core net loss of RM455.9m, which is largely below our estimates and consensus expectations. The losses in 1Q14 already made up 57% and 58% of our full-year loss forecast and consensus full-year loss estimates, respectively.

 While its Revenue Passenger Kilometres (RPK) of 12.1b was within our full-year expectations of RM47.9b, its overall yield (sen/RPK) of 29.7 sen was below our assumption of 33.3 sen.

Dividends  No dividends declared due to losses, as expected.

Key Results Highlights MAS saw its 1Q14 losses widened by 34%, YoY from a core net loss of RM340m to RM456m despite a marginal growth of 4% in revenue. The widening of losses is largely due to the compression on its total Revenue per Available Seat Kilometre (RASK) which has seen a sharp decline by 14% from 26.5 sen to 22.7 sen, partly affected by the price competition from the low-cost carriers. However, MAS did manage to lower its Cost per Available Seat Kilometre (CASK) by 11% from 27.8 sen to 24.8 sen.

 As compared to 4Q13, the widening of losses by 38% QoQ (from RM331m to RM456m) was due to the reasons mentioned above.

Outlook  Management indicated that post the MH370 incident, the turnaround plan would be an uphill battle as the incident has cast a negative sentiment on MAS, coupled with the withdrawal of the participation from the MATTA fair which had caused MAS to forego vital ticket sales.

 While management refused to disclose any information on its business restructuring plan during the teleconference, they indicated that the short-term focus would be rebuilding MAS brand name, activating all sales channels to regain momentum, and continue to drive its CASK down.

 However, apart from its efforts above, we opine that MAS needs to look into other business areas, such as “ancillary” businesses, to further boost its RASK should ticket fares remain compressed at the current levels due to the intense competitions from regional low-cost carriers.

 For FY14, MAS is looking to take delivery of 20 aircrafts with an approved CAPEX of RM5.0b to replace its old fleet. However, given its cash burn rate of RM450m per quarter and its net gearing of 2.4x as of 1Q14, we do not rule out the possibility that MAS would need to spin off some of its “assets” to partially finance the CAPEX. Hence, we note that its upcoming business restructuring plan would be crucial for MAS’ survival in the future.

Change to Forecasts  We widen our FY14-15E loss assumptions by 142%-127% to RM1.9b and RM1.4b, respectively, as we lowered our overall yield (sen/RPK) assumptions by 7%-5%.

Rating Maintain UNDERPERFORM

Valuation  Given the bleak earnings prospects, we are switching our valuation methodology from 6.9x FY14 EV/EBITDAR to 1.2x FY14 Price-to-Book valuation methodology, as we can no longer value the company using EV/EBITDAR post-earnings revision as it is at a negative level. Following our earnings and valuation methodology revision, its Target Price is further reduced by 12.5% from RM0.16 to RM0.14.

Risks to Our Call  Better-than-expected yield.

Source: Kenanga