MAS continued  to report  improving  loads, as  November’s overall  load factor  grew  1.6ppts  y-o-y  to  76.4%   while  passenger  loads  hit  80% (+4ppts).  However,  we  remain  concerned  that  these  high  loads  were achieved at the expense of yields, and would be insufficient to cover its high costs.  Maintain NEUTRAL,  with our unchanged MYR0.30 FV  based on 7.6x FY14F EV/EBITDAR.

• Operating statistics  still positive.  MAS’  overall  November  load factor continues  to  grow,  rising  1.6%ppts  y-o-y  to  76.4%,  mainly  due  to  the passenger  segment  mitigating  the  drop  in  loads  from  its  cargo  and freighter  segment.  Passenger  loads  improved  4ppts  to  80%  y-o-y,bolstered  by the  domestic  segment.  Load  factors  for  the  domestic and international  segments  came  in  at  84.7%  (+6.2ppts  y-o-y)  and  79.5% (+3.7ppts  y-o-y)  respectively  despite  the  sharp  increase  in  passenger capacity  (domestic:  +19.7%  y-o-y;  international:  +18.9%  y-o-y),  as overall revenue passenger kilometre (RPK) climbed 27.5% y-o-y.
• A  balancing act  needed. While MAS has succeeded in driving loads to record  highs  in  recent  months,  this  was  accompanied  by  a  sharp deterioration  in  yields.  The  airline  had  embarked  on  an  aggressive passenger  price  discounting  strategy,  especially  on  the  domestic  side, which  significantly  boosted  its  load  factor.  What  is  worrying  is  the significant  growth in passengers handled (+29.3%  YTD)  did not result in economies  of scale as unit costs barely  budged. We think  MAS is still trying to  find  its  footing  following  its  entry into the oneworld alliance,  with more efforts focusing on costs only in 2014.
• High  investment  risk  remains.  Ineffective  cost  management,  forex volatility and jet fuel prices  amidst a  competitive operating environment, are key risks to MAS’ turnaround plans.
• Maintain  NEUTRAL,  MYR0.30  FV  unchanged.  4Q  is  traditionally  the strongest quarter for MAS due  to the seasonally stronger traffic, spurred by  the  holiday  season.  However,  as  we  highlighted  earlier,  we  remain doubtful  of  its  cost-cutting  efforts,  at  least  in  2013.  We  maintain  our NEUTRAL recommendation,  with an unchanged FV of MYR0.30, based on 7.6x FY14F EV/EBITDAR.

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Malaysian Airline System (MAS) is Malaysia's flagship carrier with a focus on South-East Asia and Asia-Pacific markets

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Source: RHB