Stock Name: MAS
Company Name: MALAYSIAN AIRLINE SYSTEM BHD
Malaysian Airline System Bhd
(June 23, RM1.45)
Maintain hold at RM1.44 with revised target price of RM1.65 (from RM1.80): MAS' reported RM246 million 1Q11 net loss was within our RM263 million loss forecast, but significantly underperformed consensus which was expecting a profit. We have revisited MAS' fundamentals and are lowering our earnings expectations, forecasting a loss this year. MAS is struggling to cope with the challenging aviation market, hit by high fuel prices and a weak yield environment. We shift valuation methodology to price-to-book value (P/BV) from price-earnings ratio. We now value MAS at RM1.65 per share, in line with its long-term average 1.8 times P/BV and maintain 'hold'.
The year 2011 is a write-off, our previous bullish call was one year too early. We revise our jet fuel price assumption up by US$10 per bbl to US$120 per bbl (adds RM480 million to cost) and yield growth is toned down to half at 3% growth (lowers revenue by RM454 million). In its current form, MAS is unable to navigate the turbulent market. Its costs are too high and product quality is below par. This is being rectified with the fleet rejuvenation but it is not moving fast enough to save MAS from making a loss in 2011. We also lower our 2012/13 net profit forecasts by between 20% and 30% for the higher jet fuel price assumption.
Management asserts that MAS is on track to achieve the operating profit target of RM300 million to RM600 million in 2011. We are less optimistic and forecast an operating loss of RM264 million. We think 2Q11 will be just as challenging due to the high fuel price volatility and industry overcapacity that is negatively impacting on yields. Things will look much better and profitable in 2H, which is seasonally stronger, and as MAS extracts the cost benefits of new aircraft inducted into its fleet.
MAS has begun its induction process to the Oneworld alliance, it will take around 12 to 18 months. This is positive as MAS is the sole representative in Southeast Asia and we expect it to enjoy passenger throughput from other members flying into the region.
Since MAS' stock performance has been disappointing, and considering potential headwinds ahead, its parent Khazanah Nasional Bhd may consider privatising MAS as the stock is trading at its lowest historical price and valued at only 1.4 times book. At the current share price, Khazanah needs to pay less than RM1.5 billion for the remaining shares it does not own. If it teams up with the Employees Provident Fund, like their partnership for the privatisation of PLUS Expressways Bhd, it will cost just RM962 million. ' Maybank IB Research, June 23
This article appeared in The Edge Financial Daily, June 24, 2011.
Company Name: MALAYSIAN AIRLINE SYSTEM BHD
| Research House: MAYBANK | Price Call: HOLD | Target Price: 1.65 |
Malaysian Airline System Bhd
(June 23, RM1.45)
Maintain hold at RM1.44 with revised target price of RM1.65 (from RM1.80): MAS' reported RM246 million 1Q11 net loss was within our RM263 million loss forecast, but significantly underperformed consensus which was expecting a profit. We have revisited MAS' fundamentals and are lowering our earnings expectations, forecasting a loss this year. MAS is struggling to cope with the challenging aviation market, hit by high fuel prices and a weak yield environment. We shift valuation methodology to price-to-book value (P/BV) from price-earnings ratio. We now value MAS at RM1.65 per share, in line with its long-term average 1.8 times P/BV and maintain 'hold'.
The year 2011 is a write-off, our previous bullish call was one year too early. We revise our jet fuel price assumption up by US$10 per bbl to US$120 per bbl (adds RM480 million to cost) and yield growth is toned down to half at 3% growth (lowers revenue by RM454 million). In its current form, MAS is unable to navigate the turbulent market. Its costs are too high and product quality is below par. This is being rectified with the fleet rejuvenation but it is not moving fast enough to save MAS from making a loss in 2011. We also lower our 2012/13 net profit forecasts by between 20% and 30% for the higher jet fuel price assumption.
Management asserts that MAS is on track to achieve the operating profit target of RM300 million to RM600 million in 2011. We are less optimistic and forecast an operating loss of RM264 million. We think 2Q11 will be just as challenging due to the high fuel price volatility and industry overcapacity that is negatively impacting on yields. Things will look much better and profitable in 2H, which is seasonally stronger, and as MAS extracts the cost benefits of new aircraft inducted into its fleet.
MAS has begun its induction process to the Oneworld alliance, it will take around 12 to 18 months. This is positive as MAS is the sole representative in Southeast Asia and we expect it to enjoy passenger throughput from other members flying into the region.
Since MAS' stock performance has been disappointing, and considering potential headwinds ahead, its parent Khazanah Nasional Bhd may consider privatising MAS as the stock is trading at its lowest historical price and valued at only 1.4 times book. At the current share price, Khazanah needs to pay less than RM1.5 billion for the remaining shares it does not own. If it teams up with the Employees Provident Fund, like their partnership for the privatisation of PLUS Expressways Bhd, it will cost just RM962 million. ' Maybank IB Research, June 23
This article appeared in The Edge Financial Daily, June 24, 2011.
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