News  Last Friday, MAS announced that they have received a letter from its major shareholder,

Khazanah Nasional Berhad (Khazanah), requesting for the Company to undertake a selective capital reduction (SCR) and repayment exercise.

 The proposed SCR will enable all shareholders other than Khazanah to receive a total repayment amounting to RM0.27 per share, paving the way for a privatisation.

Comments  We were not surprised with the plan to privatise MAS as we have pretty much anticipated such as move in 3Q14 as mentioned in our previous sector report dated 3rd July 2014.

 We opine that the SCR offer price of RM0.27 per share by Khazanah to the minority shareholders is decent given that the offer price implies a 2.4x Price-to-Book to our FY14E book value per share of RM0.11 representing 100% premium to the industry average of 1.2x, which also shows that Khazanah’s is highly committed to privatise MAS in order to pave the way for a “restructuring program”.

 Hence, we would strongly advise that the shareholders of MAS accept Khazanah’s offer to make way for MAS privatisation given that its reserves might not be able to last till the end of FY15 due to its staggering losses.

Outlook  We believe that the long-awaited privatisation could be the best available option for MAS to undergo a major restructuring similar to how Japan Airlines underwent a corporate reorganisation back in 2010.

 Post-privatisation, MAS operations would likely remain “business as usual” for the time being. However, we would anticipate a huge cut in its workforce (abolishment of workforce unions) and unprofitable routes and renegotiation of contracts in order to achieve a leaner structure.

Forecast  No changes in forecasts.

Rating ACCEPT OFFER

Valuation  Due to the proposed SCR, our previous Target Price of RM0.14, which was based on 1.2x FY14 Price-to-Book, is not applicable.

Risks to Our Call Accepting the offer from Khazanah is practically risk free and also the best available option for minority shareholders.

Source: Kenanga