MAS (FV RM0.90 - SELL) FY11 Results Review: Mired in Losses

Stock Name: MAS
Company Name: MALAYSIAN AIRLINE SYSTEM BHD

Research House: OSK

Price Call: SELL

Target Price: 0.90

MAS undertook  massivekitchen sinking in  4Q, dragging  its full year losses to RM2.52bn (core netloss was RM1.94bn). The provisions will allow MAS to start on a clean slate.More encouragingly, yields improved to the highest achieved since 1QFY09.  As the airline's  route rationalization  progresses, we expect  yields to mend further.One concern now is how MAS can survive with its RM1bn cash on hand withoutprompting  a cash call  since air travel is weaker in the second half and jet fuel prices remain high. We raise our estimated lossfor FY12 and cut our FY13 forecast, which lead to a lower FV of RM0.90, basedon an EV/EBITDA of 8x FY13. Maintain SELL.

Kitchen sinking.MAS' Q4FY11 core loss stood at RM980m, with a full year core net loss ofRM1.94bn vs the RM314.7bn loss in 2010. If not for the kitchen sinking, MAS'full year loss would have been  inline  with  our estimate but  slightly below consensus. In 4QFY11, itundertook a major kitchen sinking exercise by making provisions relating to aircraftredelivery costs (RM602m) and one-off provisions for impairment and obsolescenceof engineering spares (RM179m), and an impairment on aircraft of RM314m. Sincethese were for potential cash costs to be incurred in the future as 34 of itsaircraft will be returned to its  lessorthis year,  we deem the costs nonexceptional. Hence any future writebacks relating to these hefty provisionswould also be seen in the same light. After the provisions, MAS would be ableto start on a clean slate.

How MAS did on theyield front.  FY11 revenue was spoton within our estimate, improving sequentially by 3.7% q-o-q although this waslower by 7.9% y-o-y due to capacity cuts and the lower revenue from theairline's cargo and other divisions. To date, MAS has cut capacity by 9% inconsolidating its route network, with another 5% more to go. The 4Q yield of26.5 sen was an improvement and the highest MAS has achieved since 1QFY09,rising by 3.9% q-o-q and 9.1% y-o-y. For the full year, yields were still higherby 3.4% y-o-y at 24.7 sen. As a comparison, AirAsia's and SIA's yields over thesame period came in at 22.6 sen (q-o-q: 6.4%, thanks to Firefly's withdrawal)and 30 sen (converted to RM, up by 3.4% q-o-q, but barely unchanged y-o-y andYTD). We expect the carrier to make more yield improvements moving forward.

Surviving, but for howlong?  Our greatest concern  now  ishow much cash burn  to expect in theimmediate term as MAS'  net debt  crept up from RM3.6bn in 9MFY11 to RM4.6bn inFY11 The airline may also see its RM1.1bn cash deplete by RM200m per quarterover the upcoming 2 quarters when travel is at a seasonal low and jet fuelprices remain high. Its  pre-deliverypayment of RM1bn will only be refunded once MAS  has secured financing for its5 A380s, due to be delivered in 2H, for which management is still negotiatingwith the ECA. There is high risk of the group making a  cash call as its funding options dry up,unless it offers convertible bonds to entice its creditors. 

Source: OSK188