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Malaysian Airline System Provisions Spoilt The Smooth Landing
Malaysian Airline System Provisions Spoilt The Smooth Landing
Malaysia
Results Review
1 March 2012
Hold (unchanged)
Share price: Target price: RM1.43 RM1.55 (unchanged)
Wong Chew Hann, CA wchewh@maybank-ib.com (603) 2297 8686 Chai Li Shin lishin@maybank-ib.com (603) 2297 8684
Stock Information
Description: National airline flying to over 100 destinations in six continents. Ticker: Shares Issued (m): Market Cap (RM m): 3-mth Avg Daily Volume (m): KLCI: Free float (%): Major Shareholders: Khazanah Tune Air Sdn Bhd EPF MAS MK 3,342.2 4,779.3 2.79 1,569.65 21.4 % 48.9 20.5 9.2
Historical Chart
3.0
2.5
Earnings forecasts lowered. We think 2012 will barely breakeven and we lower our 2012 core net profit forecast to RM5m from RM78m. We also adjust down 2013-14 earnings by -10.3% and -3.1% respectively. Our Hold call and target price remain unchanged.
Malaysian Airline System Summary Earnings Table
FYE Dec (RM m) Revenue DDecFYEMonthAbbr (RM m) EBITDAR Recurring Net Profit Recur Basic EPS (Sen) EPS growth (%) PER EV/EBITDAR (x) P/BV(x) Net Gearing (%) ROE (%) ROA (%) Earnings revision (%) Consensus net profit (RM m) Source: Maybank IB 2010A 12,978.4 1,812.5 (314.7) (9.4) n/a n/a 8.1 1.4 0.4 (25.8) (7.3) n.a n.a 2011A 13,653.9 243.3 (1,263.2) (37.8) n/a n/a 41.5 4.5 4.3 (131.6) (11.1) n.a (1,214) 2012F 13,488.3 2,377.1 4.5 0.1 n/a 1,061.6 5.8 4.5 5.4 0.4 0.0 (94.3) (215.0) 2013F 14,208.8 3,236.9 802.7 24.0 nm 6.0 5.1 2.6 2.6 43.1 6.0 (10.3) 236.7 2014F 14,342.0 3,412.3 954.9 28.6 19.0 5.0 5.2 1.7 1.2 33.9 6.6 (3.1) 573.0
RM1.95/RM1.23 3-mth (3.4) (9.3) 6-mth (21.4) (23.7) 1-yr (23.1) (27.6) YTD 10.0 7.5
Satisfactory top-line management. Overall, 4Q11 revenue rose 0.6% YoY, driven by a combination of 3.8% higher yields which offset 5.2% lower passenger volumes. MAS yield growth was respectable by industry standards, as most airlines struggled to keep yields flat. This is an indicator of the weak underlying demand for air travel. Capacity management is key. It was a challenging quarter for the industry and load factors were depressed industry-wide. MAS saw its 4Q11 passenger load factor decline by 4.9ppts YoY and the outlook is negative. Fortunately, the management has taken the right decision to scrap 9% of capacity to several loss-making routes from Feb 2012, and there are further cuts being planned. This should support better load factors going forward, a key element to ensure high yields and low unit cost. RM1,095m adjustments explained. The root cause of the RM1,095m in cost adjustments in 4Q11 relates to managements decision to scale back future capacity growth plans. Note that this is not a cash item, but rather provisions for estimated future cost expenditures. In reality, MAS will only incur the cash cost over a staggered period of 2-4 years. Some of these costs might be recoverable, as the provision amounts may be overstated due to overly conservative estimates. Redelivery cost of RM602m. MAS has a contractual obligation to repair and recondition leased aircraft into their original condition before returning them to the lessor. This will require costly structural tests, Dchecks and engine overhauls. In addition, MAS also has to compensate the lessor for the prematurely terminating the lease. Stock obsolescence cost of RM179m. Due to the disposal and early termination of aircraft, the spare parts are deemed no longer required and have to be disposed of. Impairment of freighter aircraft of RM314m. This amount relates to the disposal of freighters and markdowns on the value of existing freighters.
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2012 Outlook
Capacity shrinkage, focus on yields. MAS has cut 9% of its network capacity to various non-profitable routes since Feb 2012. There are ongoing efforts to terminate more underperforming routes by mid-2012. As shown in the table below, the Asia Pacific airlines and MAS have experienced lower load factors since 3Q11. The industry is suffering and MAS is making a smart decision to become smaller and nimbler, as this is the most effective method to preserve load factors and yields.
Asia Pacific airlines load factors
82% 80% Asia Pacific MAS
78%
76% 74%
72%
70% Jan
Source: IATA
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Fleet rejuvenation. In a refreshing outlook, MAS will rejuvenate its fleet by removing 34 old aircraft. MAS will also take delivery of 23 new aircraft which includes 13 Boeing 737-800s, 5 Airbus A330-300s and 5 Airbus A380s. This will greatly reduce the average fleet age from 12.2 years at the end of 2011 to 7.7 years by the end of 2012, making MAS average fleet age roughly on par with industry leaders such as SIA (7.3 years) and Emirates (6.9 years). This should benefit MAS on both the cost and revenue fronts. Liquidity very tight. The capex for the 34 aircraft deliveries in 2012 is estimated at RM6.0b. MAS cash balance of RM1.0b is insufficient to make an outright balance sheet financing as the current target capital ratio is 30:70 (equity:debt). Furthermore, MAS requires free cash of RM300-400m for working capital requirements, in our opinion. We think MAS will try to acquire aircraft via sale and leaseback (SLB) transactions, as this is the least capital-intensive method and might even free up some capital. A case in point is AirAsias recent SLB of 5 A320s for a disposal gain of RM200m (RM40m per aircraft for 35% profit margin). We understand from market sources that demand for SLB for B737-800s and A330-300s are strong, but less so for A380s. 70% probability MAS will raise new equity. Assuming all goes well and the average fuel price does not exceed USD130/bbl, MAS does not need to raise new equity in 2012, but the room for error is paper-thin. We predict a 70% probability that MAS will have to raise equity in 2012 due to our conviction that fuel prices will trend higher and credit availability will become more difficult.
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2. Q: What is the minimum cash level before you have no choice and have to raise new equity? A: We are looking at various means to enhance the liquidity at the moment. Among them are the possible disposal of non-core assets, selling a minority stake of our subsidiaries to strategic investors and raising more debt outright. Raising capital via new equity is the least preferred option. Our opinion: We are indifferent to this view; raising equity is not a bad idea as there is never enough cash in the airline industry. This will be an issue that will constantly be on investors minds.
3. Q: Share with us your revenue management plans in 2012? A: The core focus is yields, especially for the front end of the cabin. The effort to improve customer experience should enable better loads and yields. The new revenue management system has been put in place and it is expected to gradually bring a tangible performance increase. MAS has recently enhanced its distribution channels and will try to steer sales to its own distribution channel. Our opinion: This is the critical department that will steer MAS away from the current crisis; we will monitor its progress diligently.
4. Q: Updates on Oneworld alliance induction A: On track with schedule (late 2012) Our opinion: We are glad that the management is keeping to this plan. An alliance is the way to proceed in this day and age; not having one will be a big handicap.
5. Q: Is the profit target last revealed in the business turnaround plan still on track? A: The previous profit guidance was premised on average fuel price of USD130/bbl. The current market price for jet fuel is higher and therefore there will be adjustments to the original guidance. Our opinion: This is an outright direct and honest answer.
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INCOME STATEMENT (RM m) FY Dec Revenue EBITDAR Depreciation & Amortisation Operating Profit Interest (Exp)/Inc Associates Exceptional Items Pre-Tax Profit Tax Minority Interest Reported Net Profit Recurring Net Profit Revenue Growth % EBITDAR Growth (%) EBIT Growth (%) Net Profit Growth (%) Recurring Net Profit Growth (%) 2011A 13,653.9 243.3 (2,539.0) (2,295.7) (159.4) 10.7 1,258.1 (1,186.3) (8.4) 0.5 (1,194.2) (1,263.2) 5.2% (86.6%) NA NA 301.4% 2012F 13,488.3 2,377.1 (2,175.2) 201.9 (167.4) 11.8 0.0 46.4 (41.8) 0.5 5.0 4.5 (1.2%) 877.2% NA NA NA 2013F 14,208.8 3,236.9 (2,227.5) 1,009.4 (175.8) 13.0 0.0 846.6 (43.9) 0.5 803.2 802.7 5.3% 36.2% 399.8% 15896.6% 17729.2% 2014F 14,342.0 3,412.3 (2,241.0) 1,171.3 (184.6) 14.3 0.0 1,001.0 (46.1) 0.5 955.4 954.9 0.9% 5.4% 16.0% 19.0% 19.0%
BALANCE SHEET (RM m) FY Dec Fixed Assets Other LT Assets Cash/ST Investments Other Current Assets Total Assets ST Debt Other Current Liabilities LT Debt Other LT Liabilities Minority Interest Shareholders' Equity Total Liabilities-Capital Share Capital (m) Net Debt Working Capital Gross Gearing (%) 2011A 9,073.9 327.2 1,115.5 1,974.0 12,490.6 1,379.4 5,754.6 4,290.6 17.8 5.8 1,042.5 12,490.6 407.8 5,670.0 4,554.5 436.9 2012F 9,606.5 327.2 240.5 1,890.4 12,064.5 1,379.4 5,082.8 4,540.1 9.4 5.8 1,047.0 12,064.5 412.3 5,919.5 5,679.0 542.4 2013F 9,686.9 327.2 1,303.8 1,991.2 13,309.1 1,379.4 5,353.7 4,702.7 17.8 5.8 1,849.7 13,309.1 1,215.0 6,082.1 4,778.4 258.3 2014F 9,389.8 327.2 2,685.2 2,011.4 14,413.6 1,379.4 5,403.8 4,810.7 9.4 5.8 2,804.6 14,413.6 2,169.8 6,190.1 3,504.9 125.0
CASH FLOW (RM m) FY Dec Pre-Tax Profit Dep. & Amort. Cash tax paid Assoc. & JV Inc/(loss) Chg in Wkg.Cap. Other Operating CF Net Operating CF Capital Exp.(net) Other Invts.(net) Invts in Assoc. & JV Div from Assoc & JV Other Investing CF Net Investing CF Div Paid Chg in Gross Debt Capital Issues Other Financing CF Net Financing CF Net Cashflow 2011A (1,194.2) 2,539.0 (176.4) (647.9) (4.2) (1,583.5) (1,067.3) (661.9) 0.0 0.0 0.0 (585.9) (1,247.8) 0.0 249.6 0.0 0.0 1,244.1 (1,071.0) 2012F 5.0 2,175.2 (176.4) 459.1 (20.9) (1,263.2) 1,178.8 (1,247.8) 0.0 0.0 0.0 434.9 (812.8) 0.0 162.6 0.0 1.0 (1,241.0) (875.0) 2013F 803.2 2,227.5 (176.4) (22.3) (22.0) (1,297.2) 1,512.7 (812.8) 0.0 0.0 0.0 272.8 (540.0) 0.0 108.0 0.0 2.0 90.5 1,063.2 2014F 955.4 2,241.0 (176.4) (2.6) (23.1) (1,204.9) 1,789.4 (540.0) 0.0 0.0 0.0 433.5 (106.5) 0.0 21.3 0.0 2.0 (301.4) 1,381.5
RATES & RATIOS FY Dec EBITDAR Margin (%) EBIT Margin (%) Net Profit Margin (%) ROAE (%) ROA (%) ROCE (%) Div Payout Ratio (%) Interest Cover (x) Current Ratio (x) Quick Ratio (x) Net Debt/Equity (X) Debt/EBITDA (x) Debt/Market Cap (x) 2011A 1.8 (16.8) (8.7) (52.2) (9.6) (9.3) NA NA 1.09 2.20 4.37 23.31 1.19 2012F 17.6 1.5 0.0 0.5 0.0 0.0 NA (1.2) 1.12 2.04 5.42 2.49 1.24 2013F 22.8 7.1 5.7 55.5 6.3 5.6 NA (5.7) 1.07 2.19 2.58 1.88 1.27 2014F 23.8 8.2 6.7 41.1 6.9 6.7 NA (6.3) 1.00 2.33 1.25 1.81 1.30
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APPENDIX 1
Definition of Ratings
Maybank Investment Bank Research uses the following rating system: BUY HOLD SELL Total return is expected to be above 15% in the next 12 months Total return is expected to be between -15% to 15% in the next 12 months Total return is expected to be below -15% in the next 12 months
Applicability of Ratings
The respective analyst maintains a coverage universe of stocks, the list of which may be adjusted according to needs. Investment ratings are only applicable to the stocks which form part of the coverage universe. Reports on companies which are not part of the coverage do not carry investment ratings as we do not actively follow developments in these companies.
Disclaimer
This report is for information purposes only and under no circumstances is it to be considered or intended as an offer to sell or a solicitation of an offer to buy the securities referred to herein. Investors should note that income from such securities, if any, may fluctuate and that each securitys price or value may rise or fall. Opinions or recommendations contained herein are in form of technical ratings and fundamental ratings. Technical ratings may differ from fundamental ratings as technical valuations apply different methodologies and are purely based on price and volume-related information extracted from Bursa Malaysia Securities Berhad in the equity analysis.Accordingly, investors may receive back less than originally invested. Past performance is not necessarily a guide to future performance. This report is not intended to provide personal investment advice and does not take into account the specific investment objectives, the financial situation and the particular needs of persons who may receive or read this report. Investors should therefore seek financial, legal and other advice regarding the appropriateness of investing in any securities or the investment strategies discussed or recommended in this report. The information contained herein has been obtained from sources believed to be reliable but such sources have not been independently verified by Maybank Investment Bank Berhad and consequently no representation is made as to the accuracy or completeness of this report by Maybank Investment Bank Berhad and it should not be relied upon as such. Accordingly, no liability can be accepted for any direct, indirect or consequential losses or damages that may arise from the use or reliance of this report. Maybank Investment Bank Berhad, its affiliates and related companies and their officers, directors, associates, connected parties and/or employees may from time to time have positions or be materially interested in the securities referred to herein and may further act as market maker or may have assumed an underwriting commitment or deal with such securities and may also perform or seek to perform investment banking services, advisory and other services for or relating to those companies. Any information, opinions or recommendations contained herein are subject to change at any time, without prior notice. This report may contain forward looking statements which are often but not always identified by the use of words such as anticipate, believe, estimate, intend, plan, expect, forecast, predict and project and statements that an event or result may, will, can, should, could or might occur or be achieved and other similar expressions. Such forward looking statements are based on assumptions made and information currently available to us and are subject to certain risks and uncertainties that could cause the actual results to differ materially from those expressed in any forward looking statements. Readers are cautioned not to place undue relevance on these forwardlooking statements. Maybank Investment Bank Berhad expressly disclaims any obligation to update or revise any such forward looking statements to reflect new information, events or circumstances after the date of this publication or to reflect the occurrence of unanticipated events. This report is prepared for the use of Maybank Investment Bank Berhad's clients and may not be reproduced, altered in any way, transmitted to, copied or distributed to any other party in whole or in part in any form or manner without the prior express written consent of Maybank Investment Bank Berhad and Maybank Investment Bank Berhad accepts no liability whatsoever for the actions of third parties in this respect. This report is not directed to or intended for distribution to or use by any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation.
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APPENDIX 1
Additional Disclaimer (for purpose of distribution in Singapore)
This report has been produced as of the date hereof and the information herein maybe subject to change. Kim Eng Research Pte Ltd ("KERPL") in Singapore has no obligation to update such information for any recipient. Recipients of this report are to contact KERPL in Singapore in respect of any matters arising from, or in connection with, this report. If the recipient of this report is not an accredited investor, expert investor or institutional investor (as defined under Section 4A of the Singapore Securities and Futures Act), KERPL shall be legally liable for the contents of this report, with such liability being limited to the extent (if any) as permitted by law. As of 1 March 2012, KERPL does not have an interest in the said company/companies.
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1 March 2012
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