Thursday, May 26, 2011

MAS: 1Q11 Bleeding from Jet Fuel and Low Yield

26 May 2011
Price Target: RM1.27
Share price: RM1.58


Results
Below – Reported 1Q11 core net loss at RM352m vs HLIB FY11 estimate of RM243m profit and consensus of RM296m profit.

Deviations
Low passenger yield and cargo yield as well as high operating costs (mainly jet fuel cost)

Dividends
None

Highlights
# 1Q11 passenger demand was boosted by international segment (+15.3% yoy), offsetting lower demand from domestic side (-8.8% yoy). Passenger yield dropped 3.1% yoy due as international traffic command lower yield.

# 1Q11 cargo demand, FTK dropped by 8.2% yoy, and further hit by lower cargo yields of -2.8% yoy.

# Operating cost increased substantially by 16.4% yoy, largely due to higher jet fuel costs and staff costs.

# MAS hedged 25% of expected FY11 fuel requirement, while average price increased to US$93/bbl (WTI). Management is imposing higher fuel surcharges on selective routes.

# Net gearing expected to further deteriorate as MAS take in delivery of new aircrafts. Capacity is expected to increase marginally in FY11.

# Management bullish on Firefly in complementing the group’s existing routes, boosting MAS revenue in the next 5 years. However, its average load factor is still below AirAsia and MAS.

# Tough operating condition going forward due to softening demand, impact from Japan crisis, high jet fuel price and RM appreciation.

Risks
World crisis (ie. war, tourism and epidemic outbreak), prolong surge in jet fuel price and the development of high speed train between Singapore and Pulau Pinang.

Forecasts
Reduced earnings for FY11 to losses of RM503 to account for higher jet fuel cost. Subsequently, FY12 and FY13 earnings cut to RM169m and RM939m respectively.

Rating
Sell

Positives:
- Beneficiary of strong air traffic into Malaysia, inline with government initiatives to boost tourism sectors.
- Reduced unit operating cost with delivery of new aircrafts.

Negatives:
- Restructuring plan (BTP) subject to implementation risk.
- Competitive pressure on airfare from LCCs and FSCs.
- Surging jet fuel prices.

Valuation
Reduced target price to RM1.27 (from RM2.10) based on P/B of1.4x, or at 0.2x discount to average peers of 1.6x.


Source: HLeBroking

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