Downgrade to SELL. MAS’ 9M13 core net loss of MYR767m (-53.6% YoY) significantly disappoints. Passenger yields were on a freefall, down 17.3% YoY; and worse, management guides for weak yields to persist into 2014. We are disappointed that MAS is unable to turn a profit while enjoying its highest load factor ever. We cut our FY13-15 earnings forecasts; we now believe MAS will only be profitable in 2015 at best. We rollover our valuation base year to 2014, resulting in a lower target price of MYR0.29/share (from MYR0.35), pegged to 1.2x P/BV – in line with Asia Pacific peers. We downgrade the stock to SELL.

Positives do not outweigh the negatives. MAS’ 3Q13 core net loss of MYR292m, is substantially higher than 3Q12’s core net loss of only MYR21m. Average yield declined by 17.3% YoY, despite the Company enjoying its best ever load factor of 84.8%. This yield decline was way above our aggressive assumption of a 12% decline. MAS has achieved noteworthy progress, namely in product service quality, better operating statistics and 2.6% reduction YoY in unit cost excluding fuel. However, none of these comes close to reversing the yield decline.

We think many problems are self inflicted. At the heart of it, we think many of MAS’ problems are the direct cause of its aggressive capacity expansion. In 3Q13, its capacity grew by 41.1% YoY, accounting for 36% of the total industry growth. This new capacity has necessitated deep discounts, and explains why we saw published fares that were reminiscent of ticket prices 10 years ago. More distressing, MAS launched new services to Dubai – a route which is deemed to be unviable, and Darwin. New routes are normally loss making in their initial stages, and we feel now is not the time to launch new services.

SELL, things are not improving as fast as required. MAS’ turnaround is now in question, and we don’t think it will be profitable in 2014, possible in 2015. Until there are clearer indications of such, we see no reason in holding on to the stock.  

Source: Maybank Research - 19 Nov 2013