Alliance Research estimates the proposed four-for-one rights issue to be undertaken by Malaysia Airlines (MAS), after a
90 sen capital reduction, will help improve MAS' gearing level, increase cash flow and pay off some of the airline's existing debts.

Assuming full subscription, the exercise will raise RM3.1 billion in proceeds which would be used for its fleet renewal programme, working capital and loan repayment.

Although the rights issue would lower MAS' financial burden in the short-term, the question remains whether the airline can be turned around to be a financially sound airline over the long-term, said the research house in a note today.

"This is due to increasing competition not only from low cost carriers but also legacy carriers in the region.

"Such difficult operating environment has culminated in margin compression for MAS which is still expected to generate negative free cash flow in financial year 2013," it said.

Alliance, however, said the recent run-up in share price may be short-lived and believed the stock lacked a meaningful catalyst at this point in time as the rights issue could see investors shy away from the stock until the exercise was completed given the relatively large additional commitment of 92 sen for each
existing MAS share.

"We keep our sell recommendation on MAS but we have raised the target price to 68 sen from 55 sen previously.-- Bernama