MAS  reported  a  core  net  loss  of  MYR1.2bn  for  FY13,  mainly  due  to intense competition and  its  high cost structure. Its load active  strategy did help  the carrier  win market share, but  at  the expense of  yield and profitability.  We  believe  FY14  may  continue  to  be  a  challenging  year, unless MAS overhauls  its  business structure.  We now peg  the stock  to 1.0x FY14F P/BV and a FV MYR0.20. Downgrade to SELL.

• Losses widen. Malaysia Airlines (MAS) reported a wider core net loss of MYR1.2bn (>100% y-o-y) for FY13, mainly due to persistent pressure on yield,  which  narrowed  by  13%  y-o-y  to  23.0  sen,  as  well  as  minimal improvement in unit cost.  While the carrier’s  FY13 EBITDA improved by 35.8% y-o-y,  its high depreciation expenses  suggest that its new aircraft were not generating as much revenue as  expected, possibly  due  to  stiff competition. Even though 4Q is typically a stronger quarter, during which the carrier  can look forward to  better performance, MAS  instead  posted its first quarterly  EBITDA loss  of MYR56m (vs 3QFY13’s  EBITDA profit of  MYR52m)  for  FY13.  This  was  due  to  its  higher  expenses,  notably advertising, inflight and selling expenses.
• Struggling to strike a balance.    MAS’  attempts  to gain  market share in FY13  were  successful,  as  it  registered  a  28.5%  y-o-y  increase  in passengers carried  while its  load factor  reached  a high of 81.0%  (from 74.7%  in  FY12).  However,  the  national  carrier  still  did  not  manage  to strike a balance between enhancing yields and lowering unit costs.
• Revising our earnings  forecasts.  For FY14,  MAS plans  to have  a  net reduction  of  two  aircraft  in  its  fleet  and  boost  aircraft  utilization.  Its management  has  guided  for  a  12% y-o-y growth in capacity.  Still, we expect  that MAS  to face  a tough time  trying to significantly  beef up  its overall profitability.  On updating  our earnings model, we are  forecasting 5%/1%  declines  in  yield  for  FY14F/FY15F  respectively,  and  estimated net  losses  of  MYR761.2m  and  MYR456.0m.  We  see  a  slight improvement  in  costs  going  forward,  notably  in  terms  of  fuel  burn,although this will do little to contribute to a strong turnaround.
• Downgrade  to  SELL.  We  change  our  valuation  methodology  to  P/BV due to MAS’ poor earnings visibility, at a target P/BV of 1.0x FY14F, and lower our FV to MYR0.20 (from MYR0.30). Downgrade to SELL.

Key Takeaways 
Below  are  the  key  takeaways  from  the  analyst  conference  call  with  MAS’ management yesterday:

• The  key focus  for  2014 would be cost reduction to bring down its  cost per available seat capacity (CASK), which include optimizing the utilization of its fleet, increasing  manpower productivity, strengthening its  procurement,  and controlling maintenance costs.
• To further improve revenue by strengthening its network, partnerships and fleet, and focus more on creating ancillary income in FY14.
• Management expects market demand to grow 5% y-o-y in 2014, since MAS operates in high-growth regions.
• The airline will  take delivery of  20 aircrafts and return 22 aircraft in FY14. Hence, in order to achieve  a 12% y-o-y  increase in  capacity, MAS plans  to increase  the  utilization  of  its  aircraft  and  operat e  on  more  high-demand routes.
• Management  foresees  persistent yield pressure in FY14, which  is  why we are projecting that yield could deteriorate moving forward.

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MAS is Malaysia's flagship carrier with a focus on SEA and Asia Pacific markets

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Source: RHB