Results Review, 16 May 2014
Malaysian Airline System (MAS MK)
Sell (Maintained)
Transport - Aviation
Market Cap: USD1,088m
Target Price:
Price:
MYR0.19
MYR0.21
Macro
Risks
A Tough Period
Growth
Value
Malaysia Airlines (MAS MK)
Relative to FTSE Bursa Malaysia KLCI Index (RHS)
0.45
114
0.40
104
0.35
94
0.30
84
0.25
74
0.20
64
0.15
54
0.10
800
700
600
500
400
300
200
100
44

Mar-14
Jan-14
Nov-13
Sep-13
Jul-13
Source: Bloomberg
Avg Turnover (MYR/USD)
Cons. Upside (%)
Upside (%)
52-wk Price low/high (MYR)
Free float (%)
Share outstanding (m)
Shareholders (%)
Khazanah
12.0m/3.66m
42.9
-9.5
0.21 - 0.41
30
16,711
YTD


69.4

Share Performance (%)
1m
3m
6m
12m
Absolute
(32.3)
0.0
(31.2)
(40.0)
(44.7)
Relative
(33.0)
(1.4)
(34.5)
(45.0)
(50.1)
Shariah compliant
Jerry Lee 603 9207 7622
jerry.lee@rhbgroup.com
Continued to report losses. MAS reported core net loss of MYR448m
in 1QFY14, down 58% y-o-y. Its available seat capacity (ASK) expanded
significantly at 19% y-o-y but it was only able to grow the topline by a
mere 2%. This was mainly due to lower yields (y-o-y: -9%) and lower
contribution from cargo (y-o-y: -6%). MAS saw a 10% y-o-y drop in cost
per ASK (CASK) after cutting the unprofitable routes. But due to the 9%
y-o-y drop in yields, it failed to lower its breakeven load factor; the
minimum load it will need to achieve breakeven, which stands at 98.7%
(from 98.0% in 1QFY13 and 89% in 4QFY13). The depreciating MYR in
1QFY14 also offset the lower jet fuel price in 1QFY14.
Challenges escalated. Management acknowledged that MAS’ recovery
journey will be even tougher post-MH370, as this incident will exert more
pressure on MAS’ profitability from the loss in ticket sales, in an already
competitive environment. Now MAS has to focus on rebuilding the airline
and win back its customers. Management thinks that its Turnaround Plan
for profitability by end-2014 is now questionable.
Restructuring plans. Management did not share much with us about its
restructuring plan and did not want to comment on any possible
divestments and spin-offs.
Earnings revised downwards. We are of the view that MAS earnings
will continue to be weak, as it will take time to MAS to regain customers
back amid the intensifying competition. We now project a further drop in
yield to 8% (from 5%) and also lower its capacity growth assumptions to
+10% (from +12%) for FY14F, which then results in wider net loss to
MYR937.1m/MYR766.3m from net loss of MYR761m/MYR456m in
FY14F/FY15F respectively.
Maintain SELL. We adjust our FV to MYR0.19 (from MYR0.20) after
lowering earnings estimates, based on 1.0x FY14F PBV. Maintain SELL.
Forecasts and Valuations
Dec-11
Dec-12
Dec-13
Dec-14F
Dec-15F
Total turnover (MYRm)
13,654
13,287
14,548
15,209
16,342
Reported net profit (MYRm)
(2,524)
(433)
(1,174)
(937)
(766)
Recurring net profit (MYRm)
(1,819)
(748)
(964)
(937)
(766)
(7726.3)
(58.9)
28.8
(2.8)
(18.2)
(0.54)
(0.22)
(0.06)
(0.06)
(0.05)
Recurring net profit growth (%)
Recurring EPS (MYR)
Recurring P/E (x)
P/B (x)
na
0.67
P/CF (x)
na
EV/EBITDA (x)
na
Return on average equity (%)
Net debt to equity (%)
Our vs consensus EPS (adjusted) (%)
na
0.33
na
0.87
na
na
na
1.13
na
na
1.51
3.92
15,778
44
36
24
(110.5)
(27.3)
(38.1)
(26.3)
(28.2)
440.8
346.1
195.0
315.5
417.0
19.3
76.4
Source: Company data, RHB estimates
See important disclosures at the end of this report


3

.
3
0
.
1
0
0
.
1
0
0
Malaysia Airlines (MAS) reported core net loss of MYR448m in 1QFY14. .
0
Yields continue to come under pressure despite some improvements in 0
CASK. Management acknowledges that the situation will be getting 0
tougher post the MH370 incident and has indicated that turnaround plan
by end-2014 is not achievable. We lower our earnings estimate,
factoring in lower yields and capacity growth. Stay SELL, FV MYR0.19.

May-13
Vol m
Price Close
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
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1
Malaysian Airline System (MAS MK)
16 May 2014
1QFY14 Results Highlights
Tough time ahead post-MH370. Management acknowledged that the MH370 effect
will be an uphill struggle and the Turnaround Plan for profitability by end-2014 is now
questionable. The sales of tickets had been slowing down even before 8 March
(MH370 incident) and MAS was targeting to make the shortfall during the MATTA
Fair, which was scheduled to be held 14-16 March. MAS withdrew from participating
in MATTA Fair post MH370, which means it has foregone future ticket sales. The
impact from the MH370 incident would mainly affect its load factor and profitability in
the future, as all the expenses related to the incident would be covered by insurance
companies.
Restructuring plans not revealed. Management indicated that there are
restructuring plans in place to improve the current situation but is not ready to share
yet. Guidance given was quite vague, but the main focus will be on rebuilding the
MAS brand name, reviving its sales channels after the two months of ‘black-out’,
leveraging on its alliances’ network and being more proactive and decisive in
capacity planning. Cost savings efforts will continue and will focus mainly in
productivity, fleet renewal and improve efficiency.
Other key highlights during conference call. Below are some other key highlights
from the conference call yesterday:
-
Targeted capacity growth reduced to 10-12% from 19% earlier, which we
have also factored in.
-
May increase fuel hedging level to 30% from current level of 23%, as
management is anticipating the jet fuel price is coming down this year.
-
Will continue to price its air fares dynamically to remain competitive in the
market
Maintain SELL. We foresee MAS earnings will continue to come under pressure.
Yield is expected to ease further with the intensified competition within the industry
and the MH370 incident has tarnished its flight safety track record, which may affect
its load factor. We are lowering our yield growth assumptions to -8% (from -5%), load
factor assumption to 78% (from 81%) capacity growth assumptions to +10% (from
+15%) for FY14F, which then results in wider net loss of MYR937.1m/MYR766.3m
from net loss of MYR761m/MYR456m in FY14F/FY15F respectively. We adjust our
FV to MYR0.19 (from MYR0.20) after lowering our earnings estimate and equity
value, based on 1.0x FY14F PBV. We await further developments on its restructuring
plans, which MAS indicated will be announced in the coming weeks, which will be a
key catalyst for a proven turnaround.
See important disclosures at the end of this report
2
Malaysian Airline System (MAS MK)
16 May 2014
Figure 1: 1QFY14 Results Table
FYE Dec (MYRm)
Revenue
- Passenger revenue & surcharges
- Cargo revenue & surcharges
- Other revenue
1QFY13
3435
2628
396
411
4QFY13
3870
2944
428
498
1QFY14
3575
2792
372
411
q-o-q (%)
-7.6
-5.2
-13.1
-17.5
y-o-y (%)
4.1
6.2
-6.1
0.1
Fuel cost
-1387
-1551
-1583
2.1
14.1
Non fuel cost
- Staff cost
- Leasing
- Maintenance
- Handling and landing
- Other non fuel cost
-2050
-590
-378
-227
-340
-515
-2278
-616
-323
-276
-376
-687
-2112
-600
-307
-213
-371
-621
-7.3
-2.6
-5.0
-22.8
-1.3
-9.6
3.0
1.7
-18.8
-6.2
9.1
20.5
-3
41.3
-119.8
-390.2
4282.8
EBITDA margin (%)
-0.1
1.1
-3.4
Depreciation & Amortisation
-196
-173
-236
36.4
20.7
EBIT
EBIT margin (%)
-198
-5.8
-132
-3.4
-356
-10.0
170.1
79.4
12
-99
3
28
-105
9
26
-122
7
-6.1
16.2
-22.2
108.4
22.9
121.9
3
-137
5
-103.8
61.1
-279
-8.1
-337
-8.7
-440
-12.3
30.4
57.7
0
0.0
-4
-0.1
-3
-0.1
-15.6
2162.1
0
-2
-1
-40.4
328.0
Net profit
Core net profit
-279
-282
-343
-206
-443
-448
29.3
118.1
58.8
58.8
Net Margin (%)
-8.1
-8.8
-12.4
EBITDA
Interest income
Interest expense
Share of profit from Associated
Companies/JV
EI
Pretax profit
Pretax profit margin (%)
Tax expense
Effective tax rate (%)
MI
Comment
Passenger yield declined
Fuel costs increased due to higher capacity and
weakening of MYR against USD, offsetting the
decrease in jet fuel price.
Due to the significant drop in yields, despite the
improved unit cost (due to non-profitable route
cuts), breakeven load factor was worse off.
Continued to be weak. Will be more challenging
post MH370 incident
Source: Company data
Figure 2: Operating statistics
ASK (million)
RPK (million)
Load factor (%)
Airline RASK (sen)
Rev/RPK (sen)
1QFY13
13,357
10,227
76.6%
24.1
24.8
4QFY13
15,565
12,699
81.6%
22.7
22.5
1QFY14
15,864
12,115
76.4%
20.9
22.5
q-o-q (%)
1.9%
-4.6%
y-o-y (%)
19%
18%
-7.9%
0.0%
-13%
-9%
Airline CASK (sen)
25.3
25.3
22.8
-9.9%
-10%
9.4
15.9
9
16.3
9.2
13.6
2.2%
-16.6%
-2%
-14%
98.0%
88.9%
98.7%
- Fuel
- Non fuel
Breakeven load
factor (%)
Source: Company data
See important disclosures at the end of this report
3
Malaysian Airline System (MAS MK)
16 May 2014
Financial Exhibits
Profit & Loss (MYRm)
Dec-11
Dec-12
Dec-13
Dec-14F
Total turnover
13,654
13,287
14,548
15,209
16,342
Cost of sales
(13,274)
(11,919)
(12,703)
(13,196)
(14,068)
1,845
2,014
2,274
Gross profit
Gen & admin expenses
Selling expenses
Other operating costs
380
1,368
Dec-15F
(506)
(610)
(1,079)
(939)
(957)
(1,080)
(849)
(1,025)
(1,188)
(1,284)
(499)
(488)
(390)
(461)
(438)
Operating profit
(1,706)
(580)
(649)
(574)
(405)
Operating EBITDA
(1,249)
255
361
547
(859)
(889)
(907)
Depreciation of fixed assets
Amortisation of intangible assets
Operating EBIT
(424)
1
(545)
(33)
(35)
(46)
(46)
(46)
(1,706)
(580)
(649)
(574)
(405)
Net income from investments
29
21
29
29
29
Interest income
29
54
114
114
114
Interest expense
(159)
(235)
(437)
(488)
(488)
Exceptional income - net
(705)
316
(210)
Pre-tax profit
-
-
(2,513)
(425)
(1,153)
(919)
(751)
Taxation
(8)
(6)
(16)
(13)
(10)
Minority interests
(3)
(2)
(5)
(5)
(5)
Profit after tax & minorities
(2,524)
(433)
(1,174)
(937)
(766)
Reported net profit
(2,524)
(433)
(1,174)
(937)
(766)
Recurring net profit
(1,819)
(748)
(964)
(937)
(766)
Source: Company data, RHB estimates
Cash flow (MYRm)
Operating profit
Dec-11
(1,706)
Dec-12
Dec-14F
Dec-15F
(580)
Dec-13
(649)
(574)
(405)
934
953
Depreciation & amortisation
457
580
904
Change in working capital
708
(312)
(806)
(541)
(311)
(551)
360
575
114
Operating cash flow
(1)
28
Interest received
(29)
(54)
(114)
114
Interest paid
153
235
437
488
Dividends received
141
138
(175)
(1,004)
Tax paid
(322)
(313)
(451)
(13)
(10)
Cash flow from operations
(597)
(305)
(855)
(55)
895
(3,576)
(4,790)
(3,661)
(2,000)
1,412
1,031
1,327
(2,164)
(3,759)
(2,334)
Capex
Other investing cash flow
Cash flow from investing activities
Dividends paid
Increase in debt
Other financing cash flow
(15)
1,811
(106)
(1)
5,689
(491)
(1)
114
(1,886)
488
(272)
(1,000)
114
(886)
-
-
560
-
-
4,352
-
-
Cash flow from financing activities
1,690
5,198
4,911
-
-
Cash at beginning of period
2,085
1,014
2,148
3,871
1,929
(1,071)
1,134
1,722
(1,941)
1,014
2,148
3,871
1,929
Total cash generated
Implied cash at end of period
9
1,938
Source: Company data, RHB estimates
See important disclosures at the end of this report
4
Malaysian Airline System (MAS MK)
16 May 2014
Financial Exhibits
Balance Sheet (MYRm)
Total cash and equivalents
Inventories
Accounts receivable
Other current assets
Total current assets
Total investments
Dec-11
Dec-12
Dec-13
Dec-14F
Dec-15F
1,014
2,148
3,871
1,929
1,938
362
331
254
261
277
1,268
1,259
1,596
1,669
1,793
110
49
105
105
105
2,755
3,787
5,826
3,965
4,114
175
182
216
216
216
9,074
12,854
14,615
15,623
14,881
Intangible assets
152
154
149
149
149
Total other assets
344
314
1,049
1,049
1,049
Tangible fixed assets
Total non-current assets
9,745
13,504
16,029
17,037
16,295
12,499
17,291
21,855
21,002
20,408
Short-term debt
1,379
1,458
1,254
1,254
1,254
Accounts payable
2,644
2,343
2,669
2,748
2,916
Other current liabilities
3,111
3,232
3,356
3,356
3,356
Total current liabilities
7,134
7,033
7,279
7,358
7,526
Total long-term debt
4,291
8,090
10,518
10,518
10,518
Total assets
Other liabilities
Total non-current liabilities
Total liabilities
Share capital
Retained earnings reserve
Other reserves
Shareholders' equity
19
30
6
6
6
4,309
8,120
10,524
10,524
10,524
11,443
15,153
17,803
17,882
18,050
3,342
3,342
1,671
1,671
1,671
(2,300)
(2,717)
-
1,498
1,498
1,498
1,498
2,330
865
(72)
1,043
2,123
4,034
3,097
Minority interests
14
15
18
23
Other equity
(0)
0
0
0
Total equity
(839)
28
-
1,056
2,138
4,052
3,120
2,358
12,499
17,291
21,855
21,002
20,408
Dec-11
Dec-12
Dec-13
Dec-14F
Dec-15F
5.2
(2.7)
9.5
4.5
7.4
Operating profit growth (%)
(1503.6)
(66.0)
12.0
(11.6)
(29.4)
Net profit growth (%)
(1176.5)
(82.9)
171.3
(20.2)
(18.2)
EPS growth (%)
(1176.5)
(82.9)
(45.7)
(20.2)
(18.2)
Bv per share growth (%)
(70.4)
103.7
(62.0)
(23.2)
(24.7)
Operating margin (%)
(12.5)
(4.4)
(4.5)
(3.8)
(2.5)
Net profit margin (%)
(18.5)
(3.3)
(8.1)
(6.2)
(4.7)
Return on average assets (%)
(20.2)
(2.9)
(6.0)
(4.4)
(3.7)
Return on average equity (%)
(110.5)
(27.3)
(38.1)
(26.3)
(28.2)
Total liabilities & equity
Source: Company data, RHB estimates
Key Ratios (MYR)
Revenue growth (%)
Net debt to equity (%)
440.8
346.1
195.0
315.5
417.0
Recurrent cash flow per share
(0.18)
(0.09)
(0.05)
(0.00)
0.05
Source: Company data, RHB estimates
See important disclosures at the end of this report
5
Malaysian Airline System (MAS MK)
16 May 2014
SWOT Analysis
 oneworld alliance significantly boosts international
passengers feed
 A price war may
ensue following
Malindo’s debut
 Airlines in the
region are
becoming very
competitive
 Delivery of its
A380s and its
alliance with
oneworld opens
up new growth
possibilities
 Visit Malaysia
2014 bodes well
with the
carrier’s load
active strategy
 High depreciation and interest expenses could
dampen its bottomline
 Strong unionised workforce
 Cost escalation may be greater than revenue growth
P/E (x) vs EPS growth
P/BV (x) vs ROAE
200
2,000%
1.6
20%
180
1,300%
1.4
3%
160
600%
140
-100%
1.2
-15%
-33%
0.8
-50%
-2,200%
0.6
-68%
60
-2,900%
40
-3,600%
0.4
-85%
-103%
-120%
P/E (x) (lhs)
Jan-11
Jan-15
0.0
Jan-14
-5,000%
Jan-13
0
Jan-12
-4,300%
Jan-11
20
0.2
EPS growth (rhs)
Source: Company data, RHB estimates
P/B (x) (lhs)
Jan-15
-1,500%
80
Jan-14
100
Jan-13
-800%
Jan-12
120
1.0
Return on average equity (rhs)
Source: Company data, RHB estimates
Company Profile
MAS is Malaysia's flagship carrier with a focus on SEA and Asia Pacific markets
See important disclosures at the end of this report
6
Malaysian Airline System (MAS MK)
16 May 2014
Recommendation Chart
Price Close
0.20
0.30
0.30
0.48
0.43
0.34
0.43
1.38
1.38
0.90
0.96
1.15
0.52
1.00
1.0
1.12
2.45
1.35
1.60
1.10
1.76
1.58
Recommendations & Target Price
2.10
1.2
NR
1.4
0.8
0.6
0.4
0.2
Buy
0.0
May-09
Neutral
Aug-10
Sell
Trading Buy
Nov-11
Take Profit
Not Rated
Mar-13
Source: RHB estimates, Bloomberg
Date
Recommendation
2014-02-19
Sell
Target Price Price
0.20
0.29
2013-12-02
Neutral
0.30
0.31
2013-11-19
Sell
0.30
0.33
2013-08-21
Neutral
0.34
0.35
2013-07-25
Trading Buy
0.43
0.31
2013-05-30
Neutral
0.43
0.39
2013-05-29
Buy
0.48
0.41
2013-05-20
Buy
1.00
0.41
2013-03-13
Buy
1.00
0.33
2013-03-01
Sell
0.52
0.34
Source : RHB estimates, Bloomberg
See important disclosures at the end of this report
7
RHB Guide to Investment Ratings
Buy: Share price may exceed 10% over the next 12 months
Trading Buy: Share price may exceed 15% over the next 3 months, however longer-term outlook remains uncertain
Neutral: Share price may fall within the range of +/- 10% over the next 12 months
Take Profit: Target price has been attained. Look to accumulate at lower levels
Sell: Share price may fall by more than 10% over the next 12 months
Not Rated: Stock is not within regular research coverage
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