We see opportunities to trade in Malaysian Airline System (MAS) shares given the recent price weakness. The airline continues to post positive operating  stats  that  show  that  it  is  on  track  to  a  recovery,  but  we  still see  embedded  risks  as  the  group’s  depressed  yield  may  dampen Management’s turnaround  efforts.  In  view  of  the  38%  potential  upside, we upgrade MAS to Trading BUY, with our FV unchanged at MYR0.43. 

 

- Positive  growth  trend  continues.  MAS’  May  2013 operating  stats showed  continuing  positive  growth,  as  revenue  passenger  kilometers (RPK) surged 21.3% y-o-y while available seat kilometers (ASK) jumped 13.9% y-o-y and overall load factor inched up 3.7% y-o-y. We believe the improvements  were  mainly  attributed  to  the  benefits  arising  from  the airline’s participation in the oneworld alliance.  

 

- Macro  factors  may  continue  to  pressure  yield.  Although  the  positive growth  in  MAS’ operating  numbers  reflects  Management’s turnaround efforts,  the group  is  also  experiencing  the  yield  compression  now  being felt by full-service carriers (FSCs). Many airlines – generally price takers by  nature  -  are  under  mounting  pressure  to  slash  airfares  to  stimulate 

their load factor and compete with the region’s low-cost carriers (LCCs). MAS is no exception, as the national carrier’s RPK, ASK and load factor growth  has  been  insufficient  to  offset  its  shrinking  yields.  This  led  to  a negative surprise in its 1QFY13 results.

 

- A trading opportunity. We are keeping our assumptions for MAS at this juncture. We had earlier trimmed our yield assumption to a conservative 1%  growth  y-o-y  to  incorporate  a  negative  macro  outlook  for  the  FSCs market.  While  MAS’  current  share  price  appears  attractive,  we  would advise investors to remain cautious on potential losses in 2Q, which is a seasonally  weak  quarter  for  most  airlines.  Our  MYR0.43  FV  provides investors  with  a potential capital  gain of  38%, but  with  embedded  risks. All said, we upgrade MAS to TRADING BUY.

 

Source: RHB