Malaysian Airlines (MAS) will issue Renounceable Rights Issue of up to 13.4bn new MAS shares on the basis of 4-for-1 existing MAS share, at MYR0.23 per rights share. The theoretical ex-rights price is MYR0.35 while our ex-rights FV will be adjusted to MYR0.50. Though the dilution impact is greater than we initially expected, we maintain BUY on MAS as we remain positive on the airline’s potential turnaround.

Rights issue details unveiled. MAS disclosed on Bursa Malaysia that it will issue 13.4bn new shares at an issuance price of RM0.23 per rights share to raise total proceeds of MYR3,074m. The proceeds may be utilised for: i) working capital (43%), capital expenditure (32%), and (iii) repayment of borrowings (25%). The issuance price represents a discount of about 34.3% to the Theoretical Ex-Rights Price (TERP) of MYR0.35 and approximately 72.0% of MAS’ 5-day Volume Weighted Average Price (VWAP) of MYR0.82.

A deeper discount. Our previous forecast was based on 3 rights shares for every 2 existing shares and expectation of 5.0bn shares being issued. As it turned out, MAS decided to issue 13.4bn new shares instead due to the deep discount for the rights issue price. Since this number is higher than what we had initially expected, the dilution impact would be greater. Nonetheless, the quantum of proceeds to be raised remains unchanged, and this we have accordingly included in our earlier forecast. The TERP now stands at MYR0.35 while our ex-rights FV will be adjusted to MYRM0.50 on the ex-date. The higher than expected discount for the rights would also dilute our FY14F EPS by 80% from the existing MYR0.21 (pre-dilution) to MYR0.04.

Staying positive. MAS said 13.4bn rights shares to be issued will be premised on a minimum subscription and based on Khazanah Nasional’s full entitlement to the rights shares. In the event that only Khazanah subscribes for its full entitlement, the rights issues would involve the issuance of about 9.3bn rights shares, which would raise gross proceeds of some RM2.1bn. Nevertheless, we think MAS’ operations are improving and that the market has been quite positive on the national carrier’s turnaround efforts. Hence we believe that MAS should see a good take-up of the remaining rights shares.

Making a fresh start. Apart from the cash call, MAS has also been revamping its capital structure by reducing the par value of its shares to MYR0.10 from MYR1.00 each to partially set off RM7,863.7m in accumulated losses, including paring down its share premium. We see these as part of its move towards ‘refreshing’ its financial position and making a new start.

Maintain BUY. MAS’ operating stats in the first two months of 2013 have been encouraging and in line with our forecasts. We continue to believe that with better cost controls, route rationalisation measures and the feeding in of oneworld alliance passengers, MAS’ turnaround may just materialize. Hence, we are keeping our forecasts status quo at this juncture. Maintain BUY, with our FV still at RM1.00 (ex-rights price MYRM0.50).

Source: RHB