Saturday, August 17, 2013

Making profit from MAS

Making profit from MAS


Should MAS be taken private or should its management be given time to perform?

MURMURS of ownership change and the sale of Malaysia Airlines (MAS) is now making its rounds.

Sparking such talk was Minister in the Prime Minister’s Department Datuk Seri Idris Jala’s comments that the national airline should not be sold at a loss. And the other point he made was for the Government to exit the aviation industry. His comments were quickly clarified but checks have revealed that there is some behind-the-scene movement to what he has said.

Perhaps it was politics at play that forced him to clarify his earlier statement but StarBizWeek has learnt that there are interested parties eyeing MAS.

Their interest spawns from the incremental improvements the national airline has been making in its attempt to rectify the structural problems of the past, though that journey is far from over. Their sights are also zeroed in onto the key operational units within the airline.

Plum with RM3bil in its bank accounts, MAS’ market cap is just over RM5.2bil, which makes the airline along with the operational improvements it has registered, an attractive takeover target.

The question is should ownership of MAS revert back to private hands or should the management which has been appointed by Khazanah Nasional Bhd and the Government be given time to execute its game plan to bring about financial stability to MAS?

Khazanah has 69.4% stake in MAS and the Government holds a golden share and has the right to sell the airline or not.

“There is normally no smoke without fire. Something may be brewing for Idris to make such statements,” says an airline watcher.

Internally, MAS notified its staff that there was no sale in sight.

The question that begs an answer is why is the idea of a sale being entertained when the turnaround plan executed by Khazanah and the professionals in MAS is just starting to show results?

“At 33 sen (adjusted after all the cash calls) a share, it’s just looking so attractive after the RM8bil financial reconstruction is completed and it has cash of RM3bil. It is operationally positive as a lot of cleaning has been done. MAS should report profits by 2014 and has a newer fleet which will bring operational cost down drastically, and all these factors are good for the buyer,” says an expert.

The buyers

The lobbying for MAS has been for sometime, it is claimed.

Before the 13th general election, two groups were keen and they had done their homework on why MAS needed a change.

Of the two, one was linked to the Nadi group and a former managing director of MAS. The other was a group of young professionals who claim they had aviation expertise.

The identity of potential buyers are said to be Tan Sri Ahmad Johan of Nadi and Tan Sri Syed Azman Ibrahim of Weststar Group. Both have declined comment when contacted by StarBizWeek.

Weststar has the cash and Nadi, which owns Mofaz Air, has the expertise. Ahmad Johan also has a stake in Malindo Air and runs a MRO facility which he wants to build into a sizeable facility.

Syed Azman has RM6bil worth of contracts to provide helicopter services to the oil and gas sector and an expansion into passenger flight services is seen as an extension to what he has.

Syed Azman, known also as the “AP King” has the cash. US-based KKR is paying RM650mil for about a third of Weststar Aviation which is going for a listing next year. The listing should raise even more money for Syed Azman.

Internally, the airline’s biggest union, MAS Employees Union (Maseu), is using its political clout to change the management. They don’t see eye-to-eye with Ahmad Jauhari Yahya’s style and believe a home-grown candidate can do a better job.

“It is a no-confidence issue even though something good is being done at MAS,” says an expert.

The union is also unhappy that the commercial unit is headed by foreigners as it feels MAS has proficient local talent to head that job.

Maseu in 2012 lobbied the Government to undo the share swap agreement to get AirAsia’s boss Tan Sri Tony Fernandes out of MAS. He sold his 20% stake in the airline last year.

MAS being in the hands of entrepreneurs is not new. It was controlled by Tan Sri Tajuddin Ramli but he sold his shares to the Government for RM8 a share or RM1.7bil. What guarantee is there that the new buyers will not do the same thing a few years down the road?

At 33 sen, MAS may be looking attractive but its net tangible asset per share is 56 sen (as per end March) and Khazanah is certainly not going to sell at the NTA because it has pumped a lot of money into the airline. For the recent rights issue, it forked out RM2.7bil for its portion.

CAPA Centre for Aviation analyst Brendan Sobie asks “what value is there if there is a sale, anyone can come and make a bid? It’s political and this is not the first time the sale has been speculated.”

The prize?

The biggest fear of any sale or privatisation is that the parties will asset-strip the airline and park those lucrative ancillary businesses into their own companies.

MAS has five core businesses – passenger, cargo, ground handling, catering services and maintenance, repair and engineering (MRO). The attraction of the MRO business is that it makes money and is certified internationally. Ground services is another business that has good potential as between April and June, MAS carried 4.2 million passengers – an increase from the 3.3 million in the same period last year. There is also potential to do ground handling for other airlines and it has the potential of being something like Singapore Airport Terminal Services (SATS).

And while cargo business may now be depressed, it is only a matter of time before it improves. The cargo division has often provided good returns for MAS.

“Is this exercise to help the new buyers asset-strip or help the airline solve its problems? That should be clearly spelt out if there is indeed a sale,” said an expert.

Legacy consideration

MAS is no stranger when it comes to rescue attempts. Over the past decade, it has undergone restructuring and turnarounds, but the reality is that none seemed to have worked.

Airline experts say the reason why the airline keeps finding itself in financial trouble is because no one seems to be able to fix the basic problem – MAS spends more than it earns.

Being a national airline, it has commercial, policy and rural air services (RAS) routes to ply. It has to please the government and state governments by plying particular routes and destinations. Those are called policy routes and some of which are loss-making.

The net effect is that its commercial business has been subsidising the policy business. As far as RAS is concerned, it is vital rural routes that needs connectivity and that service is being fully subsidised by the government.

Being in a cyclical business, MAS like all airlines is susceptible to external changes, oil shocks and competition. As a result of such, plus the policy routes, its margins are razor thin at 2%, says an expert.

One big element missing from its balance sheet is boatload of cash, something Singapore Airlines and Emirates have.

The absence of which means that when there is an external issue affecting the industry, MAS slumps into the red and does not have huge reserves to ride out any eventualities.

The lack of large cash reserves also hinders MAS to upgrade its product offering over the years to stay ahead of the pack. SIA and Emirates upgrades its product offering periodically to stay as champions of the skies.

An old fleet MAS is dealing with results in huge maintenance bills. Supplies are also overpriced and the entry of new management seems to bloat the workforce. “Was there interest to address the root cause or just provide drips to keep it afloat all these years?” asks the expert.

The improvements

While the perception might be bleak for MAS, the reality may not be the case. Both the chairman Tan Sri Md Nor Yusof and CEO Ahmad Jauhari Yahya have undertaken a financial restructuring to strengthen its balance sheet and to improve its operational efficiency.

MAS’ net gearing ratio in the first quarter of 2012 was 6.1 times. That has dropped to 4.9 times for the first quarter of 2013 and for quarter two, the ratio has been reduced to 1.3 times.

That puts MAS in a better position to negotiate for aircraft purchases because banks will be willing to talk to them.

MAS has unearthed huge inventories for spares and that has since been addressed. Various contracts that were over-priced have also been renegotiated.

“Operationally they are positive but they still do not have the profits to show at this juncture,” says the expert.

Maybank Investment Bank analyst Moshsin Aziz has a buy call on the stock and forecast a RM384mil core net profit for current financial year ending Dec, 31, 2013 and RM724mil next year. Last year, MAS reported a net loss of RM571mil. A year earlier, the loss was a staggering RM2.5bil.

The airline reported its highest ever load factor of 84.3% for June and that is a 7% growth from 2012.

“The A380 product is really attractive and we are getting the passenger loads, now it is about focusing on the yields,” says a source.

But MAS is also blamed for dumping fares to get passengers for some routes and that explains why it is not getting the yields.

“Competition especially from AirAsia and Malindo is hurting and globally Emirates and SIA are big competitors that have routes, destinations and big bucks to change their product and appeal to suit the customers needs, MAS does not at this juncture have that,” the source adds.

Still, the airline today is carrying 47,000 passengers every day from 10,000 in 2011 when Jauhari and Md Nor first came in. Last year, the daily number of passengers was 37,000.

MAS today flies 17% more flights per day, managing 340 flights per day that serves 60 destinations. The entry into oneworld is adding more passengers but yields are still depressed.

“With RM3bil cash in the bank, they are now in a position to talk to aircraft manufacturers for more planes and banks are willing to lend money for aircraft purchases. Two years ago, they could not even think ahead. Then they were bleeding cash no less than RM5mil a day and would have run out of cash in four months,” said someone familiar with the airline.

MAS appears to be heading back into profitability but it will take more time. The issue is whether the Government will give Jauhari and Md Nor time to show what they can do or sell MAS?

Source/Extract/Excerpts/来源/转贴/摘录: THESTAR.COM.MY
Publish date: 17/08/13

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