Malaysia Airlines (MAS)’ overall load factor  for October dipped  2.7ppts m-o-m while  passenger loads  for  its  domestic and international flights also fell. As shown in its 3Q results, strong loads may not translate into strong  earnings  if  operating  costs  remain  high.  Maintain  MYR0.30  FV but revise our recommendation to NEUTRAL (from SELL).

• A  slight  dip  in  Oct.  MAS’  October  load  factor  of  78.4%  was  down slightly from 81.1% in September but still stronger than the 73.5% posted in  the  same  month  in  2012.  Its  passenger  load  factor  fell  to  81.2%  in October  from  86.5%  in  the  preceding  month  as  revenue  passenger kilometers  (RPK)  for  both  domestic  and  international  flights  declined during the month,  although its available seat kilometers (ASK) continued to grow in tandem with the carrier’s strategy to increase  flight  frequency. MAS’  cargo  volume  was  quite  flattish  in  Oct.  All  in,  the  carrier’s  load active strategy had definitely led to improved load vs 10MFY12.
• Will strong loads  lead to  strong earnings?  As MAS’ 3QFY13 results showed, although the historically  strong  3Q  load  boosted  its topline by 11.4% y-o-y,  its  yield erosion and ‘sticky’ cost structure  led to the carrier reporting a core loss of MYR278m during the quarter. Its dynamic pricing strategy  and  high  fleet  utilization  rate  did  help  to  bolster  revenue,  but depressed  yields  capped  revenue  growth  while  its  high  cost  structure wiped out the topline contribution. Moving forward, apart from growing its revenue,  MAS  should  start  to  more  effectively  keep  a  lid  on  costs; otherwise, we foresee it continuing to face challenges.
• Risks.    Ineffective  cost management, volatility in  foreign currency rates as  well  as  jet  fuel  price,  together  with  a  competitive  operating environment, are key risks to MAS’ turnaround plans.
• Revise to NEUTRAL, but risks still high. We revise our call on MAS to NEUTRAL as the share price has plunged from MYR0.35 to MYR0.315 since we called a SELL  on the stock  following the release of its  results.We  think  MAS  may  still  face  headwinds  as  yields  continue  to  come under pressure while its  high cost structure may offset  its efforts to spur revenue  growth.  Maintain  FV  at  MYR0.30,  based  on  7.6x  adjusted FY14F EV/EBITDAR, which is a slight discount from  full service carriers’ average 7.9x

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MAS is Malaysia's flagship carrier with a focus on the South-East Asia and Asia Pacific markets

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Source: RHB