Khazanah  is  proposing  to  privatise  MAS  at  MYR0.27.  We  see  cutting staff  costs  and  capacity  as  the  low-hanging  fruit.  We  recommend investors to take up the MYR0.27 offer (which is also our new FV  from MYR0.19  previously),  as  we  believe  a  solid  turnaround  remains  far-fetched.  The  offer  is  valued  at  1.93x  FY15F  P/BV,  vs  the  average  1.5x FY15 P/BV for global airlines.   

Taking  MAS  private.  Khazanah  made  an  offer  to  privatise  Malaysian Airline  System  (MAS)  at  MYR0.27,  a 12.5%  premium  to  its last  price  of MYR0.24,  which  gives  a  valuation  of  1.29x  1QFY14  P/BV.  This  gives minorities  an  opportunity  to  exit  MAS  at  a  slight  premium,  which  is  a preferred scenario vs bankruptcy. Khazanah has a 69.4% stake in MAS, and would need to obtain approval from at least 50% in number and 75% in  value  of  the  disinterested  shares  at  the  upcoming  EGM.  The restructuring plan  will be unveiled by end-August. We believe minorities would  probably  approve  the  proposal,  as  the  prospect  of  a  sustainable turnaround  remains  far-fetched,  in  our  view.  We  forecast  a  net  loss  of MYR937m thus MAS’ book value per share could get reduced to 19sen.   

Privatisation  set  to  restructure  MAS  effectively.  Khazanah  believes the  proposed  privatisation  would  give  it  more  flexibility  to  execute  the restructuring plan and put in place an appropriate capital structure. It has yet  to  reveal  its  restructuring  plan,  which  we  understand  would  be unveiled  as  early  as  next  week.  According  to  news  media,  this  may involve a combination of capacity reduction (notably the loss-making and low-yielding  routes)  and  job  cuts  on  as  much  as  30%  of  its  total workforce.  Any  significant  job  cuts  could  mean  large  expenses  on compensation, which we have yet to include in our earnings forecasts. In 2006, MAS incurred a one-off expense of MYR497m to compensate for 2,622  employees  who  took  up  the  voluntary  separation  scheme.  This accounted  for  11.4%  of  total  workforce  back  then  (see  our  13  June report MAS – Where Should MAS Land?).   

Accept offer. We believe this offers investors  an opportunity to exit the ailing  carrier.  We  recommend  investors  to  take  up  the  MYR0.27  offer (which  is  also  our  new  FV  from  MYR0.19  previously),  as  we  believe  a solid turnaround remains far-fetched. The offer is valued at 1.93x FY15F P/BV,  vs  the  average  1.5x  FY15  P/BV  for  global  airlines.  We  expect MAS to be relisted once a sustainable turnaround is made.

Recommendation Chart

Source: RHB