Malaysia  Airlines  (MAS)’ operating statistics for July continued  to  see  positive  growth,  in  line  with  the airline’s  strategy  of  boosting  market share  to  achieve  scale  and  generate  higher  revenue  to  improve profitability. We think the strategy is working despite the airline having to  sacrifice  yield,  as  MAS  is  now  generating  positive  operating  cash flow. Maintain NEUTRAL, with its FV at MYR0.34.   
 
- Overview of stats. MAS’ operating statistics continued to improve YTD, with  overall  load  factor  for  7M2013  rising  4.3%  y-o-y  to  76.5%.  The passenger division’s load factor for July came in at 83.3% (-1.0% m-o-m, +9.1%  y-o-y),  largely  boosted  by  the  international  passengers  division’s load factor of 84.0% (-0.3% m-o-m, +9.4% y-o-y). Note that for the past 10 years, the airline recorded a load factor of >80% for only five months. Meanwhile,  despite  facing  fierce  competition  in  the  domestic  market  – which  resulted  in  a  1.6%  m-o-m  drop  in  revenue  passenger  kilometers (RPK)  –  MAS’ domestic  passengers  division  was  still  able  to  record  an encouraging load factor of 78.0% (-5.6% m-o-m, +9.9% y-o-y),  while its cargo unit saw a slight 1.4% y-o-y improvement in its cumulative seven-month load factor.  

- Painful  but  effective.  MAS’ strategy to focus on maximising  its  load  at the  expense  of  yield  may  seem  painful,  but  the  strategy  appears  to  be bearing  fruit  with    the  group  posting  stronger  operating  cash  flow  of MYR480m in 2QFY13 vs MYR147m in 1QFY13. We are of the view that the airline is on the right track to break even by FY14.

- Expecting  numbers  to  improve  further.  We  expect  MAS  to  report  a further improvement in its operating statistics in 2HFY13, coinciding with the seasonal peak in air travel. Management has guided for a 20% h-o-h (+30%  y-o-y)  increase  in  capacity  for  2H  as  the  carrier  deploys  more aircraft to serve additional frequencies.  

- High  investment  risks.  The  softening  of  the  MYR  against  the  USD, fluctuating  jet  fuel  prices  and  the  highly  competitive  operating environment are risks to MAS’ turnaround plans. 

- Maintain NEUTRAL, FV unchanged. We are keeping our forecasts and valuation  unchanged  for  now  with  our  NEUTRAL  call  retained  (FV: MYR0.34 derived from 9x adjusted FY14F EV/EBITDAR).

Source: RHB