Malaysia  Airlines’  (MAS)  2QFY13  results  came  in  stronger  as  we expected,  although  it  was  still  in  the  red.  The airline’s more robust operating  stats  boosted  its  to  and  bottom  lines.  MAS  will  continue  to focus  on  its  revenue  growth  to  improve  profitability.  As  our  new earnings  forecasts  are  prompted  by  its  EBITDA  shortfall,  we  derive  a new MYR0.34 FV and downgrade MAS to NEUTRAL. 
 
- Numbers  have  improved.  MAS  reported  a  2QFY13  core  net  loss  of MYR200.5m  (-41.1%  q-o-q  ,  -3.0%  y-o-y),  were  largely  within  our  and street’s  expectations.  Despite  reporting  a  net  loss  for  the  quarter,  it posted  positive  EBITDA  of  MYR119.6m  vs  a  loss  of  MYR60.5m  in 1QFY13.  The  improvement  was  mainly  attributed  to:  i)  stronger operating  stats,  ii)  improved  cost  per  ASK  (CASK),  and  iii)  a  higher aircraft utilization rate.

- Revenue  in  focus.  MAS’  strategy  moving  forward  is  to  focus  on improving  its  topline  by  growing  capacity  by  increasing  the  utilization  of its aircraft.  Management  believes  that  as  long  as  the  revenue  growth is stronger  than  its  costs,  the  bottomline  should  gradually  improve.  We think  the  strategy  has  yielded  positive  outcomes  as  MAS  chalked  up  a remarkable MYR480m in positive operating cash flow in 2QFY13.

- Revising our forecast. We are revising our earnings model as we had previously  been  too  bullish  on  the  group’s EBITDA  although  earnings had  been  in  line.  We  are  now  revising  higher  our  available  service kilometer  (ASK)  and  load  factor  forecasts,  in line with MAS’ strategy in boosting  load  factor  under  the  current  challenging  operating environment. Our forecasts are revised lower to a MYR367m loss (from MYR248m) for FY13 and a net profit of MYR120m (from MYR164m) for FY14.  

- Risks.  We  believe  the  key  risks  include  the  drastic  compression  of airfares,  drop  in  load  factors,  and  volatility  in  jet  fuel  price  and  foreign currencies.  

- Downgrade  to  Neutral.    We  maintain  our  valuation  parameter  at  9x adjusted  FY14F  EV/EBITDAR.  Following  revisions  to  our  earnings forecasts, MAS’ FV has been lowered  to  MYR0.34  (from  MYR0.43). Accordingly, we downgrade MAS to NEUTRAL (from Trading Buy). 

Source: RHB