Malaysia Airlines (MAS) reported core net loss of MYR448m in 1QFY14. Yields continue to come under pressure despite some improvements in CASK.  Management  acknowledges  that  the  situation  will  be  getting tougher post the MH370 incident and has indicated that turnaround plan by  end-2014  is  not  achievable.  We  lower  our  earnings  estimate, factoring in lower yields and capacity growth. Stay SELL, FV MYR0.19.

• Continued  to report losses.  MAS reported core net loss of MYR448m in 1QFY14, down 58% y-o-y. Its available seat capacity (ASK) expanded significantly at 19% y-o-y  but  it  was only able to grow the topline by  a mere  2%.  This  was  mainly  due  to  lower  yields  (y-o-y:  -9%)  and  lower contribution from cargo (y-o-y: -6%).  MAS saw a 10% y-o-y drop in  cost per ASK (CASK) after cutting the unprofitable routes. But due to the 9% y-o-y  drop  in  yields,  it  failed  to  lower  its  breakeven  load  factor;   the minimum load it will need to achieve breakeven, which stands at 98.7% (from 98.0% in 1QFY13  and 89% in 4QFY13).  The  depreciating  MYR  in 1QFY14 also offset the lower jet fuel price in 1QFY14.
• Challenges  escalated.  Management acknowledged  that MAS’ recovery journey will be even tougher  post-MH370, as this incident will exert more pressure on MAS’  profitability  from the loss in ticket sales, in an already competitive environment. Now MAS has to focus on rebuilding the airline and win back its customers. Management thinks that its Turnaround Plan for profitability by end-2014 is now questionable.
• Restructuring plans. Management did not share much with us about its restructuring  plan  and  did  not  want  to  comment  on  any  possible divestments and spin-offs.
• Earnings revised downwards.  We are of the view that MAS earnings will continue to be weak, as it will take time to MAS to regain customers back amid  the intensifying competition. We  now project a further drop in yield to  8%  (from 5%)  and  also lower its capacity growth assumptions  to +10%  (from  +12%)  for  FY14F,  which  then  results  in  wider  net  loss  to MYR937.1m/MYR766.3m  from  net  loss  of  MYR761m/MYR456m  in FY14F/FY15F respectively.
• Maintain  SELL.  We  adjust  our  FV  to  MYR0.19  (from  MYR0.20)  after lowering earnings estimates, based on 1.0x FY14F PBV. Maintain SELL.

1QFY14 Results Highlights
Tough time ahead post-MH370.  Management acknowledged that the MH370 effect will be an uphill struggle and the Turnaround Plan for profitability by end-2014 is now questionable.  The  sales  of  tickets  had  been  slowing  down  even  before  8  March (MH370  incident)  and  MAS  was  targeting  to  make  the  shortfall  during  the  MATTA Fair, which was scheduled to be held 14-16 March. MAS withdrew from participating in  MATTA  Fair  post  MH370,  which  means  it  has  foregone  future  ticket  sales.  The impact from the  MH370 incident would mainly affect its load factor and profitability in the  future,  as all the expenses related to the incident  would be covered by insurance companies.

Restructuring  plans  not  revealed.  Management  indicated  that  there  are restructuring plans in place to improve  the  current situation but is  not ready to share yet.  Guidance  given  was  quite  vague,  but  the  main  focus will  be  on  rebuilding  the MAS  brand  name,  reviving  its  sales  channels  after  the  two  months  of  ‘black-out’, leveraging  on  its  alliances’  network  and  being  more  proactive  and  decisive  in capacity  planning.  Cost  savings  efforts  will  continue  and  will  focus  mainly  in productivity, fleet renewal and improve efficiency.

Other key highlights during conference call. Below are  some other  key highlights from the conference call yesterday:
-  Targeted  capacity  growth  reduced  to  10-12%  from  19%  earlier,  which  we have also factored in. 
-  May  increase  fuel  hedging  level  to  30%  from  current  level  of  23%,  as management is anticipating the jet fuel price is coming down this year.
-  Will continue to price its  air  fares dynamically  to remain  competitive in the market

Maintain  SELL.  We  foresee  MAS  earnings  will  continue  to  come  under  pressure.
Yield is expected to ease further with the intensified competition within the industry and the  MH370 incident has tarnished  its flight safety track record, which may affect its load factor. We are lowering our  yield growth assumptions to -8% (from -5%), load factor  assumption  to  78%  (from  81%) capacity  growth  assumptions  to  +10%  (from +15%) for FY14F, which then  results  in wider net loss  of  MYR937.1m/MYR766.3m from net loss of MYR761m/MYR456m in FY14F/FY15F respectively. We adjust our FV  to  MYR0.19  (from  MYR0.20)  after  lowering  our  earnings  estimate  and  equity value, based on 1.0x FY14F PBV. We await further developments on its restructuring plans, which MAS indicated will be announced in the coming weeks, which will be a key catalyst for a proven turnaround.

Source: RHB