Malaysian Airline System Bhd
(MAS) (April 19, RM2.22)
Maintain outperform at RM2.15 with target price of RM3: Since last Thursday, many flights to and from European airports have been cancelled as a result of a second volcanic eruption in Iceland. MAS flights to London, Amsterdam, Paris and Frankfurt have been cancelled, disrupted or re-routed although flights to Rome still continue.
It is difficult to estimate the negative impact of this natural disaster on MAS as it depends on how long the ash cloud lingers in the environment, if a third eruption happens, if passengers rebook and reschedule or if they permanently cancel their flights.
We believe that the impact on airlines like MAS will not be as significant as the European carriers or other Asian hub carriers that carry a lot of traffic from Europe. We, therefore, maintain our earnings forecasts, target price of RM3 (six times CY12 core earnings per share) and outperform recommendation. We advise investors to focus on potential re-rating catalysts such as improved results in FY10 from the global yield recovery and the structural fleet renewal.
The volcanic eruption in Iceland on April 15 has blanketed much of European airspace with ash, threatening the safety of flights. The IATA estimated that airlines could turn in US$200 million (RM644 million) losses for each day of disruption. The cost of grounding British Airways' entire long-haul fleet for a day is about US$20 million while Finnair said it was losing €2 million (RM8.65 million) revenue per day.
Airlines worst affected are those headquartered in Europe as they have to ground the majority of their planes and stop both long-haul and short-haul flights. However, airlines based in Asia are affected only to the extent of their flights to Europe and some connecting traffic to Australia.
For MAS, flights to its five destinations in Europe have been affected but its primary focus is on regional Asian flights, which remain unscathed. According to the 2008 annual report, flights to Europe and Middle East combined have a 30% revenue market share. Assuming 15% of passenger and freight revenue is affected for one week, MAS could see RM33 million in lost revenue, which would reduce our FY10 net profit forecast by 10%. However, the true impact may be harder to estimate given that some connecting traffic may also be disrupted.
Qantas has said that it expected flights to Europe to be cancelled for the whole of this week. Some meteorologists say that if the ice on the crater melts, another crater could open, leading to another ash plume. Others pointed out that in 1821, the same volcano erupted and it lasted for a year.
Although it is impossible to predict the eventual outcome of this disaster, we are confident that MAS will not be as badly affected as the European carriers or other Asian hub carriers that carry a lot of kangaroo traffic between Europe and Australia. SIA depends on European flights for about 25% of its revenue and almost 20% on Australia/New Zealand.
We recently turned bullish on MAS because (1) the rights issue is finally over, (2) the stock has lagged behind regional peers like AirAsia and SIA, (3) analysts are almost universally bearish on the stock, (4) the macroeconomic environment is improving, and (5) the major fleet renewal programme should contribute to significant unit cost reduction by FY12.
The outcome of the European flight disruptions is impossible to predict but MAS's focus on the Asian market should reduce the impact on the airline. The stock remains an outperform and our preferred aviation pick in the region.
We retain our earnings forecasts and our end-CY10 target price of RM3, which is based on six times CY12 core EPS. However, we think MAS can eventually reach RM4 (price/earnings of eight times) over a two-year period. We have used CY12 earnings as it better reflects MAS' true potential due to continuing core net losses in 2010 and shallow profits in 2011. - CIMB Research, April 19
This article appeared in The Edge Financial Daily, April 16, 2010.
(MAS) (April 19, RM2.22)
Maintain outperform at RM2.15 with target price of RM3: Since last Thursday, many flights to and from European airports have been cancelled as a result of a second volcanic eruption in Iceland. MAS flights to London, Amsterdam, Paris and Frankfurt have been cancelled, disrupted or re-routed although flights to Rome still continue.
It is difficult to estimate the negative impact of this natural disaster on MAS as it depends on how long the ash cloud lingers in the environment, if a third eruption happens, if passengers rebook and reschedule or if they permanently cancel their flights.
We believe that the impact on airlines like MAS will not be as significant as the European carriers or other Asian hub carriers that carry a lot of traffic from Europe. We, therefore, maintain our earnings forecasts, target price of RM3 (six times CY12 core earnings per share) and outperform recommendation. We advise investors to focus on potential re-rating catalysts such as improved results in FY10 from the global yield recovery and the structural fleet renewal.
The volcanic eruption in Iceland on April 15 has blanketed much of European airspace with ash, threatening the safety of flights. The IATA estimated that airlines could turn in US$200 million (RM644 million) losses for each day of disruption. The cost of grounding British Airways' entire long-haul fleet for a day is about US$20 million while Finnair said it was losing €2 million (RM8.65 million) revenue per day.
Airlines worst affected are those headquartered in Europe as they have to ground the majority of their planes and stop both long-haul and short-haul flights. However, airlines based in Asia are affected only to the extent of their flights to Europe and some connecting traffic to Australia.
For MAS, flights to its five destinations in Europe have been affected but its primary focus is on regional Asian flights, which remain unscathed. According to the 2008 annual report, flights to Europe and Middle East combined have a 30% revenue market share. Assuming 15% of passenger and freight revenue is affected for one week, MAS could see RM33 million in lost revenue, which would reduce our FY10 net profit forecast by 10%. However, the true impact may be harder to estimate given that some connecting traffic may also be disrupted.
Qantas has said that it expected flights to Europe to be cancelled for the whole of this week. Some meteorologists say that if the ice on the crater melts, another crater could open, leading to another ash plume. Others pointed out that in 1821, the same volcano erupted and it lasted for a year.
Although it is impossible to predict the eventual outcome of this disaster, we are confident that MAS will not be as badly affected as the European carriers or other Asian hub carriers that carry a lot of kangaroo traffic between Europe and Australia. SIA depends on European flights for about 25% of its revenue and almost 20% on Australia/New Zealand.
We recently turned bullish on MAS because (1) the rights issue is finally over, (2) the stock has lagged behind regional peers like AirAsia and SIA, (3) analysts are almost universally bearish on the stock, (4) the macroeconomic environment is improving, and (5) the major fleet renewal programme should contribute to significant unit cost reduction by FY12.
The outcome of the European flight disruptions is impossible to predict but MAS's focus on the Asian market should reduce the impact on the airline. The stock remains an outperform and our preferred aviation pick in the region.
We retain our earnings forecasts and our end-CY10 target price of RM3, which is based on six times CY12 core EPS. However, we think MAS can eventually reach RM4 (price/earnings of eight times) over a two-year period. We have used CY12 earnings as it better reflects MAS' true potential due to continuing core net losses in 2010 and shallow profits in 2011. - CIMB Research, April 19
This article appeared in The Edge Financial Daily, April 16, 2010.
