Sunday, February 16, 2014

Malaysian Airline System - Desperate to stay relevant (CIMB)

Malaysian Airline System
Current RM0.31
Target RM0.17
Desperate to stay relevant

MAS remains committed to lifting its aircraft utilisation and load factor despite the resulting plunge in yields, which is dragging the carrier deeper into the red. It is not taking its foot off the pedal in order to stay relevant, and shareholders will be the ones bearing the brunt.

We maintain our Reduce call and our target price, which is based on 1x CY14 P/BV. Share price de-rating catalysts include a persistent weak yield environment that will keep MAS in the red.

Recent developments
MAS saw its core net loss more than quadruple to RM294m in 3Q13 vs. RM70m in 3Q12. Although its revenue expanded by 9% yoy on the back of a 20% rise in ASK capacity and a 37% rise in RPK demand, yields collapsed 11% yoy during 3Q13. Much of the capacity increase must have been loss making, as operating cost rose 12% yoy, faster than revenue growth, driving MAS into EBITDA losses. The 4% yoy depreciation of the ringgit also inflated the ringgit value of US$-denominated cost items, which account for half its operating costs. The domestic passenger business was hit particularly hard by systemic overcapacity, with yields down 29% and RASK down 21% yoy.

What to expect for 2014
MAS remained steadfast in its strategy of pushing up aircraft utilisation and defending its market share. The carrier has indicated that it will not pull back its capacity to lift its yields and hence we expect yields to stay weak in 2014. As AirAsia and Malindo will also not cede their respective market share, the overcapacity in the domestic and ASEAN markets will weigh on MAS's 2014 earnings.

Avoid at all cost
Stay away. In an environment of significant competition from Malindo and AirAsia – both with probably lower costs than MAS – we believe that MAS cannot win the capacity war without burning a huge hole in the shareholders' pockets. However, a reversal of the present strategy is also unpalatable. If MAS reduces its capacity, its fixed costs will then be spread over a smaller ASK capacity denominator. Malindo and AirAsia will then likely step in to fill the gap that MAS leaves behind, causing the total industry capacity to remain pretty much the same, but with MAS having a much smaller market share and relevance. In short, MAS is stuck.

Source/Extract/Excerpts/来源/转贴/摘录: CIMB-Research,
Publish date: 24/01/14

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