Highlights

MAS major shareholder, Khazanah has revealed a new restructuring plan dubbed “Rebuilding a National Icon”, in an attempt to revive MAS (return to profitability). Post restructuring, Khazanah intended to relist NewCo MAS. The whole exercise will span over 5 years.

Key Highlights:

1) Recapitalizing MAS – Delist OldCo, transfer into NewCo and inject new funds. Budgeted total funds of RM6.0bn (including privatization).

2) Routes Rationalization – Cut unprofitable routes, focus on regional and domestic routes (including fleet restructuring) and revenue yield management. Targeting to improve unit revenue by 10-15%.

3) Lean Cost Structures – Several initiatives to lower unit cost including right-sizing staff count (cutting 30% to 14,000), operational consolidation and contracts renegotiation. Targeting cost advantage against Asian FSCs, cost parity with Middle East FSCs and shorthaul cost within 15% of the LCC competition.

Comment

The restructuring plan indicates government’s committed support for MAS continued operation through new funding.

Routes rationalization exercise will likely improve its yieldcost gaps. We expect MAS to cut long haul capacity (cut loss making routes and leverage on Oneworld alliance) and focus more on regional and domestic capacity (build up economy of scales and provide strong connectivity to Oneworld alliance).

The plan also addressed the need for leaner operational cost structures. Despite several initiatives mentioned, we believe it’s relatively hard for MAS to achieve its targets, especially the benchmark against LCC.

The exercise is overall positive to MAHB (MAS continue operations) and AirAsia X (MAS cutting long haul routes), but negative to AirAsia and Malindo.

Risks

World crisis (ie. war, tourism and epidemic outbreak), delay in KLIA2 completion, high jet fuel price and the development of high speed train between Singapore and Pulau Pinang.

Forecasts

Unchanged.

Rating

NEUTRAL

Positives –

• Strong growth in passenger movements.
• Liberalization of ASEAN open sky policy.

Negatives –

• High jet fuel cost.
• Yield pressures due to overwhelming capacity growth.

Valuation

Maintained HOLD on AirAsia with unchanged target price of RM2.20 based on SOP.

Maintained SELL on MAS with unchanged target price of RM0.27 (Accept Offer) based on offer price.

Maintained BUY on MAHB with unchanged target price of RM9.38 based on SOP.

Source: Hong Leong Investment Bank Research - 2 Sep 2014