May 19, 2010

MAS - MAS 1Q artificially higher, says OSK

Stock Name: MAS
Company Name: MALAYSIAN AIRLINE SYSTEM BHD
Research House: OSK

Malaysian Airline System Bhd (MAS)
(May 18, RM2.04)
Reiterate sell at RM2.06 with target price of RM1.50
: On the back of robust air passengers and cargo traffic, MAS managed to trim its 1Q core loss to half of that in the previous year but this was still way above our and street estimates.

While we expect further improvement in air traffic and yield, especially after a seasonally weak quarter, the key drawback is still the stock's already rich valuation. Therefore, we reiterate our sell recommendation with a 12-month target price of RM1.50.

Excluding the RM329 million compensation received from Airbus for delay in the delivery of A380s from 2007 to 2011 and a marked-to-market (MTM) gain of RM56.7 million for fuel hedging, MAS' core net loss of RM75.6 million for 1Q was way above our estimates of full-year profit and market expectation of a loss of only RM50.3 million for FY10.

Furthermore, as 1Q is a seasonally lower travel period compared to 4Q, the quarter-on-quarter (q-o-q) loss widened, mainly attributed to weaker traffic against the relatively high fuel costs. Nevertheless, core loss was slashed by about half compared to 1QFY09, mainly driven by a huge 29.4% and 28.7% year-on-year (y-o-y) jump in international and domestic air traffic.

Also, the cargo numbers continued to shine, with a PBT (profit before tax) of RM25.3 million in 1Q against a loss of RM85 million in the previous year, boosted by a combination of higher load tonne kilometres (LTK) of 31.3% y-o-y and a 16.4% jump in overall cargo yield to RM79.50 per LTK.

We think the recent volcano eruption in Iceland may not have severely impacted MAS given its limited route exposure to the European region. While the management has said that the ash crisis may result in a RM15 million loss, we think the actual loss may be subjective, as most passengers stranded by the closure of air space may have to catch the later flights to their respective destination.

Sentiment is also positive, with the management expected to add capacity with the delivery of three leased B738s in 3Q and two new B738s in 4Q. This, together with the gradually increasing air fares despite being applicable to only selected routes, may progressively boost overall yield.

Meanwhile, a key risk to MAS remains on its fuel hedges covering 60% and 40% of its fuel requirement in FY10 and FY11 respectively at around US$100 (RM322) per barrel should crude oil continues to slip.

We are keeping our original estimates despite the poor 1Q given a potential revival in the next few quarters. While we reckon the completion of a recent 1-for-1 rights issue has beefed up the company's balance sheet, its valuation is still an obstacle to investment.

Our fair value of RM1.50, which offers no upside, implies an aggressive 1.3 times book value and 27 times PER (price-earnings ratio) on FY10, is also at a premium to renowned airlines like Singapore Airlines, which prompts us to maintain our sell recommendation. ' OSK Research, May 18
This article appeared in The Edge Financial Daily, May 19, 2010.

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