Malaysian Airline System Bhd (MAS) (Oct 28, RM1.48)
Maintain buy with target price RM1.80: In 3Q11, the number of passengers MAS carried fell by 4.5% quarter-on-quarter (q-o-q), mainly dragged down by domestic routes, which fell by 9.7% q-o-q. Although movement is seasonally weaker in 3Q on a year-on-year (y-o-y) basis, the number of passengers carried grew by only 1% to 3.3 million boosted by a 3.6% increase in international routes, but offset by a 3.8% drop from the domestic segment.
The drop in the domestic segment is mainly due to increased competition from rival AirAsia, which has been steadily capturing more market share from MAS. Load factor in 3Q11 was relatively flat on a q-o-q basis, but fell by 3.1 percentage points y-o-y to 76% as its total capacity per available seat kilometres (ASK) grew by a sharper 6.3% compared with a 2.7% growth in revenue per passenger kilometre (RPK).
In 9M11, MAS’ load factor was relatively flat at 75.8% as demand grew in tandem with capacity expansion at 9%. Again, demand for international routes outpaced domestic routes, growing by 10.3%, offsetting the 4.1% drop in domestic routes. Demand for cargo in 3Q11 continued to be weak on the back of the economic slowdown in the developed economies. Y-o-y, despite a cut in capacity by 12.7%, load factor deteriorated by 2.9% points to 68.9%, as MAS’ load tonne per kilometre (LTK) fell by a sharper 16.3% y-o-y.
For 9M11, total demand for cargo fell by 14.7% ahead of the 5.8% cut in capacity. This has led to a 7.1 percentage point drop in load factor to 68%. In comparison with its regional peers, the performance of MAS’ cargo division was clearly weaker. SIA’s cargo demand grew by 3% y-o-y in 9M11 while Cathay Pacific’s fell by only 2.8% y-o-y.
In 3Q11, jet fuel price averaged US$125 (RM382) per barrel, some 40% higher than the US$88 per barrel average in 3Q10. With a moderating operating statistic performance coupled with higher jet fuel prices, we continue to expect MAS’ 3Q11 results to be in the red. Over the past several months, despite crude oil prices easing below US$100 per barrel, the price of jet fuel has remained high at US$125 per barrel as the crack spread widened to between US$30 to US$40 per barrel.
The range mirrors the trough level in 2008. Our earnings model imputes jet fuel assumption of US$115 and US$120 per barrel for FY11 and FY12. There is no change to our earnings forecast. Also intact is our “buy” recommendation premised on the group’s transformation and restructuring potential. Target price is unchanged at RM1.80 based on a price-to-book value multiple of 1.8 times.
We believe earnings-wise, MAS has likely hit the bottom in 1H11, barring a resurgence in oil price. In an effort to cut costs, MAS has already taken various measures including managing its capacity by cutting loss-making routes and merging flights. — Affin IB Research, Oct 28
This article appeared in The Edge Financial Daily, October 31, 2011.
Maintain buy with target price RM1.80: In 3Q11, the number of passengers MAS carried fell by 4.5% quarter-on-quarter (q-o-q), mainly dragged down by domestic routes, which fell by 9.7% q-o-q. Although movement is seasonally weaker in 3Q on a year-on-year (y-o-y) basis, the number of passengers carried grew by only 1% to 3.3 million boosted by a 3.6% increase in international routes, but offset by a 3.8% drop from the domestic segment.
The drop in the domestic segment is mainly due to increased competition from rival AirAsia, which has been steadily capturing more market share from MAS. Load factor in 3Q11 was relatively flat on a q-o-q basis, but fell by 3.1 percentage points y-o-y to 76% as its total capacity per available seat kilometres (ASK) grew by a sharper 6.3% compared with a 2.7% growth in revenue per passenger kilometre (RPK).
In 9M11, MAS’ load factor was relatively flat at 75.8% as demand grew in tandem with capacity expansion at 9%. Again, demand for international routes outpaced domestic routes, growing by 10.3%, offsetting the 4.1% drop in domestic routes. Demand for cargo in 3Q11 continued to be weak on the back of the economic slowdown in the developed economies. Y-o-y, despite a cut in capacity by 12.7%, load factor deteriorated by 2.9% points to 68.9%, as MAS’ load tonne per kilometre (LTK) fell by a sharper 16.3% y-o-y.
For 9M11, total demand for cargo fell by 14.7% ahead of the 5.8% cut in capacity. This has led to a 7.1 percentage point drop in load factor to 68%. In comparison with its regional peers, the performance of MAS’ cargo division was clearly weaker. SIA’s cargo demand grew by 3% y-o-y in 9M11 while Cathay Pacific’s fell by only 2.8% y-o-y.
In 3Q11, jet fuel price averaged US$125 (RM382) per barrel, some 40% higher than the US$88 per barrel average in 3Q10. With a moderating operating statistic performance coupled with higher jet fuel prices, we continue to expect MAS’ 3Q11 results to be in the red. Over the past several months, despite crude oil prices easing below US$100 per barrel, the price of jet fuel has remained high at US$125 per barrel as the crack spread widened to between US$30 to US$40 per barrel.
The range mirrors the trough level in 2008. Our earnings model imputes jet fuel assumption of US$115 and US$120 per barrel for FY11 and FY12. There is no change to our earnings forecast. Also intact is our “buy” recommendation premised on the group’s transformation and restructuring potential. Target price is unchanged at RM1.80 based on a price-to-book value multiple of 1.8 times.
We believe earnings-wise, MAS has likely hit the bottom in 1H11, barring a resurgence in oil price. In an effort to cut costs, MAS has already taken various measures including managing its capacity by cutting loss-making routes and merging flights. — Affin IB Research, Oct 28
This article appeared in The Edge Financial Daily, October 31, 2011.
