Malaysian Airline System Bhd (Dec 8, RM1.34)
Maintain hold at RM1.35 with fair value of RM1.25: We maintain our “hold” call on MAS with an unchanged fair value of RM1.25 per share, following an analyst briefing on the unveiling of its business plan yesterday. We continue to peg MAS at 0.9 times FY12F book value of RM1.40 per share.
Its business plan envisions the group returning to profit by 2013 and encompasses two key areas:(i) a recovery plan entailing RM1.2 billion to RM1.5 billion in combined cost and revenue improvement in the next 12 months; and (ii) “game changing” strategies involving a new regional premium airline, alliances, MAS-AirAsia collaboration and ancillary business spin-offs. Management is targeting FY12F bottom line to range between a RM165 million net loss and a RM238 million net profit.
Key aspects in the recovery plan are: (i) reduction in available seat kilometres (ASK) by a net 12% (15% reduction in highest bleeding routes offset by a 3% increase in the most profitable routes); (ii) accelerated returns of leased aircraft; (iii) cost efficiency in operating a brand new fleet largely to be delivered by end-2012; and (iv) rightsizing its workforce.
While capacity reduction should be pretty straightforward, workforce downsizing and a change to a performance-driven incentive mechanism could face resistance, especially from the unions. In addition, the accelerated return of leased aircraft to Penerbangan Malaysia Bhd could translate into penalties if MAS is unable to sub-let or sell the aircraft.
We have raised FY12 forecast to a net loss of RM380 million (from a loss RM463 million previously). We expect MAS to break even in FY13F against a RM158 million net loss projection previously. The improvements are mainly driven by lower ASK assumptions and factor in 4% to 5% yield improvement over FY12/FY13F. However, there is a risk of load factor and yield improvements from the restructuring being neutralised if underlying demand slowdown becomes more pronounced.
While we are positive on MAS’ business plan from a structural perspective, we believe it is too early to turn bullish on the stock given: (i) Muted earnings visibility as a weak global economy in 2012 does not support air travel — loads and pricing power are negatively affected, particularly for premium travel; (ii) Risk of a cash call to support fleet renewal, which is central to MAS’ business plan, if profitability and cash flows do not improve as much as expected; (iii) Valuation of 0.96 times price-to-book value is not compelling compared with SIA (one time) and Cathay (0.9 times) which entail much stronger balance sheet positions to weather a cyclical sector slowdown. — AmResearch, Dec 8
This article appeared in The Edge Financial Daily, December 9, 2011.
Maintain hold at RM1.35 with fair value of RM1.25: We maintain our “hold” call on MAS with an unchanged fair value of RM1.25 per share, following an analyst briefing on the unveiling of its business plan yesterday. We continue to peg MAS at 0.9 times FY12F book value of RM1.40 per share.
Its business plan envisions the group returning to profit by 2013 and encompasses two key areas:(i) a recovery plan entailing RM1.2 billion to RM1.5 billion in combined cost and revenue improvement in the next 12 months; and (ii) “game changing” strategies involving a new regional premium airline, alliances, MAS-AirAsia collaboration and ancillary business spin-offs. Management is targeting FY12F bottom line to range between a RM165 million net loss and a RM238 million net profit.
Key aspects in the recovery plan are: (i) reduction in available seat kilometres (ASK) by a net 12% (15% reduction in highest bleeding routes offset by a 3% increase in the most profitable routes); (ii) accelerated returns of leased aircraft; (iii) cost efficiency in operating a brand new fleet largely to be delivered by end-2012; and (iv) rightsizing its workforce.
While capacity reduction should be pretty straightforward, workforce downsizing and a change to a performance-driven incentive mechanism could face resistance, especially from the unions. In addition, the accelerated return of leased aircraft to Penerbangan Malaysia Bhd could translate into penalties if MAS is unable to sub-let or sell the aircraft.
We have raised FY12 forecast to a net loss of RM380 million (from a loss RM463 million previously). We expect MAS to break even in FY13F against a RM158 million net loss projection previously. The improvements are mainly driven by lower ASK assumptions and factor in 4% to 5% yield improvement over FY12/FY13F. However, there is a risk of load factor and yield improvements from the restructuring being neutralised if underlying demand slowdown becomes more pronounced.
While we are positive on MAS’ business plan from a structural perspective, we believe it is too early to turn bullish on the stock given: (i) Muted earnings visibility as a weak global economy in 2012 does not support air travel — loads and pricing power are negatively affected, particularly for premium travel; (ii) Risk of a cash call to support fleet renewal, which is central to MAS’ business plan, if profitability and cash flows do not improve as much as expected; (iii) Valuation of 0.96 times price-to-book value is not compelling compared with SIA (one time) and Cathay (0.9 times) which entail much stronger balance sheet positions to weather a cyclical sector slowdown. — AmResearch, Dec 8
This article appeared in The Edge Financial Daily, December 9, 2011.
