Stock Name: MAS
Company Name: MALAYSIAN AIRLINE SYSTEM BHD
Research House: CIMB
Malaysian Airline System Bhd
(May 26, RM1.55)
Downgrade to underperform, reduce target price to RM1.52 (from RM2.30): MAS significantly undershot our expectations with a 1QFY11 core net loss of RM415 million. We had forecast RM247 million core net profit for the full year and were too optimistic in our projections.
The variance arose from lower than expected international passenger yield and weaker than expected domestic loads, which we have now adjusted in our model.
We now forecast a core net loss of RM560 million for this year and slash core net profit for FY12/FY13 by between 39% to 94%.
MAS' poor results will shock the market and we expect significant downgrades by analysts, which may be the key de-rating catalyst. We downgrade MAS from 'outperform' to 'underperform' and reduce the target price from RM2.30, based on seven times core price-earnings ratio, to RM1.52, pegged to two times price-to-book value.
The shift to book valuation is necessary given the sharp reduction in our profit forecasts. We recommend a switch to AirAsia Bhd.
MAS' passenger business is suffering from strategic mistakes. We were taken aback by the performance of the international passenger segment which saw a 5% year-on-year fall in yields, reversing three consecutive quarters of y-o-y improvement. In contrast, Singapore Airlines improved its yield by 9% y-o-y.
MAS over-expanded capacity by 12.5% y-o-y, forcing it to cut fares to stimulate demand. Although the passenger load factor rose 1.9 percentage points to 77.8%, it was not enough to prevent a 2.8% decline in revenue per available seat per kilometre (ASK), which was disastrous when high fuel costs pushed cost per ASK up 4.6%.
On the domestic sector, capacity expansion was modest at only 1% but MAS tried to push up fares too aggressively, leading to a 13.7% y-o-y rise in domestic yield.
Consequently, demand collapsed 8.8% and the domestic passenger load factor dropped 6.4 percentage points to 60.3%, the lowest ever in memory.
As a result, domestic revenue per ASK rose a mere 2.8% y-o-y, which implied a squeeze in profitability of the domestic business since cost per ASK rose 4.6%.
The cargo business also suffered a 19% y-o-y reduction in operating profit as demand fell 8.2% y-o-y. MAS failed to adjust cargo capacity which rose 4% y-o-y, causing loads to drop nine percentage points to 68.5%.
In contrast, SIA Cargo's demand rose 5% y-o-y and it was more pro-active in keeping capacity in line with demand. MAS' group core net loss of RM415 million in 1QFY11 was 56% more than the RM267 million core net loss of last year's 1Q. ' CIMB Equities Research, May 26
This article appeared in The Edge Financial Daily, May 27, 2011.
Company Name: MALAYSIAN AIRLINE SYSTEM BHD
Research House: CIMB
Malaysian Airline System Bhd
(May 26, RM1.55)
Downgrade to underperform, reduce target price to RM1.52 (from RM2.30): MAS significantly undershot our expectations with a 1QFY11 core net loss of RM415 million. We had forecast RM247 million core net profit for the full year and were too optimistic in our projections.
The variance arose from lower than expected international passenger yield and weaker than expected domestic loads, which we have now adjusted in our model.
We now forecast a core net loss of RM560 million for this year and slash core net profit for FY12/FY13 by between 39% to 94%.
MAS' poor results will shock the market and we expect significant downgrades by analysts, which may be the key de-rating catalyst. We downgrade MAS from 'outperform' to 'underperform' and reduce the target price from RM2.30, based on seven times core price-earnings ratio, to RM1.52, pegged to two times price-to-book value.
The shift to book valuation is necessary given the sharp reduction in our profit forecasts. We recommend a switch to AirAsia Bhd.
MAS' passenger business is suffering from strategic mistakes. We were taken aback by the performance of the international passenger segment which saw a 5% year-on-year fall in yields, reversing three consecutive quarters of y-o-y improvement. In contrast, Singapore Airlines improved its yield by 9% y-o-y.
MAS over-expanded capacity by 12.5% y-o-y, forcing it to cut fares to stimulate demand. Although the passenger load factor rose 1.9 percentage points to 77.8%, it was not enough to prevent a 2.8% decline in revenue per available seat per kilometre (ASK), which was disastrous when high fuel costs pushed cost per ASK up 4.6%.
On the domestic sector, capacity expansion was modest at only 1% but MAS tried to push up fares too aggressively, leading to a 13.7% y-o-y rise in domestic yield.
Consequently, demand collapsed 8.8% and the domestic passenger load factor dropped 6.4 percentage points to 60.3%, the lowest ever in memory.
As a result, domestic revenue per ASK rose a mere 2.8% y-o-y, which implied a squeeze in profitability of the domestic business since cost per ASK rose 4.6%.
The cargo business also suffered a 19% y-o-y reduction in operating profit as demand fell 8.2% y-o-y. MAS failed to adjust cargo capacity which rose 4% y-o-y, causing loads to drop nine percentage points to 68.5%.
In contrast, SIA Cargo's demand rose 5% y-o-y and it was more pro-active in keeping capacity in line with demand. MAS' group core net loss of RM415 million in 1QFY11 was 56% more than the RM267 million core net loss of last year's 1Q. ' CIMB Equities Research, May 26
This article appeared in The Edge Financial Daily, May 27, 2011.
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