For 2QFY14, Malaysia Airlines reported a wider core net loss, due to weaker yields and load factor. Overall costs surged along with the increased capacity. On a positive note, unit costs had improved on cost-cutting efforts. Maintain NEUTRAL with a MYR0.27 FV. We recommend accepting the privatisation offer of MYR0.27 as valuation may deteriorate on further accumulated losses and a possible cash call,which could dilute its value. 

Losses widen as capacity increases. Malaysia Airlines reported a wider core net loss of MYR371m (+88% y-o-y) for its 2QFY14, bringing its cumulative 1HFY14 losses to MYR819m (+52% y-o-y). The poor results were attributable to a combination of weak yields due to competition and poor loads post the MH370 incident, as well as higher fuel costs in tandem with the increased capacity. In 2QFY14, passenger yield dropped 5% y-o-y, with load factor dropping by 6.7 ppts y-o-y to 73.7%. Overall unit costs and non-fuel unit costs saw an improvement in 2Q14 as it inched lower by 8% and 14% y-o-y respectively as a result of the cost-cutting efforts. However, as more capacity was added, coupled with the weaker loads, losses widened. 

Khazanah proposed to privatise Malaysia Airlines at MYR0.27as the first step of its restructuring plan. Khazanah is expected to announce the plan today (Friday, 29 Aug). We envision the restructuring would entail cutting loss-making routes, a reduction in capacity by 10 to 15%, and a reduction in workforce. A financial daily has reported that Khazanah may cut as many as 6,000 of Malaysia Airlines’ employees (approximately 25%-30% of total workforce). Based on our calculation, this would likely mean the company incurring MYR1.2bn in one-off expenses for thevoluntary separation scheme (VSS) which in turn it could save going forward up to MYR734m annually in staff costs. 

NEUTRAL maintained with our FV of MYR0.27unchanged (same as Khazanah’s offer price). There was no analysts briefing for the quarterly results under review. Given the higher-than-expected losses in 1HFY14, we now project higher losses of MYR1.2bn in FY14F (from MYR937m losses we estimated earlier), after adjusting for the lower load factor. We advise minority shareholders to accept the offer, as Malaysia Airlines could still see challenging times ahead in its turnaround attempt. The likelihood of another round of capital injection for the VSS scheme will further enlarge its share base and reinforce expectations of prolonged losses in the medium term, which could further deteriorate its value.

Source: RHB