Stock Name: MAS
Company Name: MALAYSIAN AIRLINE SYSTEM BHD
Research House: OSK
Malaysian Airline System Bhd
(April 20, RM1.81)
Downgrade to sell at RM1.18 with revised target price RM1.60 (from RM1.76): MAS took investors and sell-side analysts on a one-hour joyride on its newly delivered, latest generation A330-300. The aircraft's cabin, equipped with the best in-flight entertainment and seat comfort, is a sight to behold.
This may be the game changer for MAS as it will put the national carrier on par with the likes of Singapore Airlines, Emirates and Cathay Pacific. With the latest generation A330s joining its ageing fleet, MAS will be on par with the leading full-service carriers in terms of passenger comfort and cabin ambiance, which it lacked previously despite having one of the world's best ratings for cabin crew hospitality.
Overall, the enhancement in customer experience from the new aircraft looks set to lure passengers loyal to other carriers to give MAS a try, notably business travellers. The new A330s will be deployed to serve the Middle East, Australia, China and India routes.
MAS will take delivery of five A330-300s this year and 10 more up to 2015. The airline also has the option of taking up an additional 10 A330- 300s.
With another four 737-800s, including the five A330-300s, to be delivered this year (either as replacement or as new additions), this would be MAS' key earnings kicker for a turnaround as the new aircraft offer far superior fuel burn (on better aerodynamics and engineering enhancements coupled with the higher number of seats and tonnage load), lower maintenance costs and more reliability and flying hours compared with its old aircraft.
Our assumption is premised on a 6% available seat kilometre (ASK) growth. MAS aims to possess the youngest fleet among the world's airlines by 2015. This will allow it to cut unit costs by 15% over the next few years, which we think is achievable, judging from the mileage recorded by AirAsia's associates (up 3% to 6% y-o-y) after their fleet renewal.
For MAS, we see improvement in the quantum of savings given that the A330-300s are for long-haul flights, which effectively yield better mileage compared with short-haul routes as a significant amount of fuel is consumed during take-off.
We have lowered our FY11/12 earnings by 18% after including a higher jet fuel price assumption of US$124.5 (RM376) per barrel for FY11, which would effectively nudge up the effective jet fuel barrel price the airline consumes to US$115 per barrel from US$111 per barrel (given that it has hedged 25% of its FY11 fuel requirement at an average price of US$88 per barrel world trade index).
Our sensitivity analysis found that every US$1 increase in jet fuel price per barrel from our base case assumption (of US$115 per barrel) will nudge up earnings by 5.63% for MAS.
We expect MAS to be profitable this year and reiterate that the carrier is on track for a turnaround in FY13. However, we think that high oil prices will weigh on sentiment and dampen earnings for the time being. Following the lower earnings forecast we downgrade MAS to 'sell' from 'neutral'.
Our new fair value on MAS is RM1.60 (previously RM1.76), premised on 8.5 times earned value/earnings before interest, taxes, depreciation and amortisation, its average long-term historical valuation, and after taking off its FY11 net debt totalling RM1.8 billion (net gearing of 62%). ' OSK Research, April 20
This article appeared in The Edge Financial Daily, April 21, 2011.
Company Name: MALAYSIAN AIRLINE SYSTEM BHD
Research House: OSK
Malaysian Airline System Bhd
(April 20, RM1.81)
Downgrade to sell at RM1.18 with revised target price RM1.60 (from RM1.76): MAS took investors and sell-side analysts on a one-hour joyride on its newly delivered, latest generation A330-300. The aircraft's cabin, equipped with the best in-flight entertainment and seat comfort, is a sight to behold.
This may be the game changer for MAS as it will put the national carrier on par with the likes of Singapore Airlines, Emirates and Cathay Pacific. With the latest generation A330s joining its ageing fleet, MAS will be on par with the leading full-service carriers in terms of passenger comfort and cabin ambiance, which it lacked previously despite having one of the world's best ratings for cabin crew hospitality.
Overall, the enhancement in customer experience from the new aircraft looks set to lure passengers loyal to other carriers to give MAS a try, notably business travellers. The new A330s will be deployed to serve the Middle East, Australia, China and India routes.
MAS will take delivery of five A330-300s this year and 10 more up to 2015. The airline also has the option of taking up an additional 10 A330- 300s.
With another four 737-800s, including the five A330-300s, to be delivered this year (either as replacement or as new additions), this would be MAS' key earnings kicker for a turnaround as the new aircraft offer far superior fuel burn (on better aerodynamics and engineering enhancements coupled with the higher number of seats and tonnage load), lower maintenance costs and more reliability and flying hours compared with its old aircraft.
Our assumption is premised on a 6% available seat kilometre (ASK) growth. MAS aims to possess the youngest fleet among the world's airlines by 2015. This will allow it to cut unit costs by 15% over the next few years, which we think is achievable, judging from the mileage recorded by AirAsia's associates (up 3% to 6% y-o-y) after their fleet renewal.
For MAS, we see improvement in the quantum of savings given that the A330-300s are for long-haul flights, which effectively yield better mileage compared with short-haul routes as a significant amount of fuel is consumed during take-off.
We have lowered our FY11/12 earnings by 18% after including a higher jet fuel price assumption of US$124.5 (RM376) per barrel for FY11, which would effectively nudge up the effective jet fuel barrel price the airline consumes to US$115 per barrel from US$111 per barrel (given that it has hedged 25% of its FY11 fuel requirement at an average price of US$88 per barrel world trade index).
Our sensitivity analysis found that every US$1 increase in jet fuel price per barrel from our base case assumption (of US$115 per barrel) will nudge up earnings by 5.63% for MAS.
We expect MAS to be profitable this year and reiterate that the carrier is on track for a turnaround in FY13. However, we think that high oil prices will weigh on sentiment and dampen earnings for the time being. Following the lower earnings forecast we downgrade MAS to 'sell' from 'neutral'.
Our new fair value on MAS is RM1.60 (previously RM1.76), premised on 8.5 times earned value/earnings before interest, taxes, depreciation and amortisation, its average long-term historical valuation, and after taking off its FY11 net debt totalling RM1.8 billion (net gearing of 62%). ' OSK Research, April 20
This article appeared in The Edge Financial Daily, April 21, 2011.
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