PP 7767/09/2010(025354)

21 April 2010

Malaysia Corporate Highlights

RHB Research
Institute Sdn Bhd
A member of the
RHB Banking Group
Company No: 233327 -M

B r ief ing Not e

21 April 2010
MARKET DATELINE

M’sian Airline System Share Price

Fair Value
:
:
RM2.29
RM1.60
Flights To Europe To Resume Today, To Cap Net Recom : Underperform
(Maintained)
Gearing At 2x Over The Next Three Years

Table 1 : Investment Statistics (MAS; Code: 3786) Bloomberg: MAS MK

Net Net
FYE Turnover Profit# EPS# Growth PER C.EPS* P/NTA P/CF ROE Gearing NDY
Dec (RMm) (RMm) (sen) (%) (x) (sen) (x) (x) (%) (%) (%)
2009 11,309.9 (672.9) (40.3) nm nm - 6.2 (2.9) nm Cash 0.0
2010f 12,283.6 381.4 11.4 (128.3) 20.1 (4.0) 2.1 (1.9) 10.1 0.2 0.0
2011f 12,259.2 480.0 14.4 25.8 15.9 12.0 1.8 (10.3) 11.2 0.4 0.0
2012f 12,201.9 567.9 17.0 18.3 13.5 19.0 1.6 (11.9) 11.7 0.5 0.0
Main Market Listing/Non Trustee Stock /Non Syariah-Approved Stock By The SC #Excluding EI * Consensus Based On IBES

♦ Flights to Europe to resume today. MAS will resume its flights to Europe
from today, as more airports in major cities in Europe reopen with the threat Issued Capital (m shares) 3,342.2
Market Cap(RMm) 7,653.5
of volcanic ash cloud from Iceland subsiding. While acknowledging that
Daily Trading Vol (m shs) 1.0
there will be financial impact from aircraft grounding for five days, MAS
52wk Price Range (RM) 1.80-2.75
believes that it will be mitigated by traffic backlog.
Major Shareholders: (%)
♦ Fleet renewal plan not a re-rating catalyst. MAS took the trouble to Penerbangan M’sia Bhd 69.3
highlight again the fleet renewal plan it has put in place. However, it did EPF 10.3
acknowledge for the first time that the move is not pre-emptive but to pace
itself with its competitors. As such, we are more inclined to see MAS’s fleet
FYE Dec FY10 FY11 FY12
renewal plan as a neutral development, and not so much a re-rating catalyst. EPS Revision (%) - - -
♦ Net gearing to peak at 2x in FY12/12. MAS guided that it will cap its net Var to Cons (%) +385 +20 -11
gearing at 2x over the next three years despite the heavy new aircraft
delivery. This target appears achievable. Based on our estimate, the firm Share Pice Chart
order in FY12/10-12 will cost MAS a total of RM10.9bn. With net cash and
shareholders’ fund estimated at RM3.5bn and RM3.4bn respectively at
present, ceteris paribus, MAS’s net gearing will only go up to 2.2x even MAS
is to own 100% of the new delivery up to FY12/12. In reality, we believe
MAS will partially fund its new delivery with leases that are off balance sheet.
♦ Forecasts. Maintained.
♦ Risks to our view. These include: (1) A stronger-than-expected recovery
in the air travel sector; (2) Lower jet fuel cost; and (3) Effective containment Relative Performance To FBM KLCI
of outbreaks of pandemic diseases.
FBM KLCI
♦ Road to recovery not without speed bumps. We believe the airline
sector is poised for improved prospects in 2010, in line with the recovery in
the global economy, but not without some speed bumps along the way such
as: (1) A mild rebound in the global economy will not materially stimulate MAS
demand for air travel; (2) Over the short term, new capacity will continue to
hit the market, intensify competition and capping yields; and (3) Rising
crude oil prices that will crimp margins. Indicative fair value is RM1.60
based on 14x FY12/10 EPS, in line with its nearest comparable issue
Singapore Airlines Ltd. Maintain Underperform.
Joshua CY Ng
(603) 92802151
joshuang@rhb.com.my

Please read important disclosures at the end of this report.

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Flights To Europe To Resume Today, To Cap Net Gearing At 2x Over The Next Three Years

♦ Highlights. Key takeaways from MAS’s Investors Day yesterday are:

1. MAS’s flights to Europe will resume from today, with the threat of volcanic ash cloud from Iceland subsiding;

2. MAS took the trouble to highlight again the fleet renewal plan it has put in place, but did acknowledge for the
first time that the move is not pre-emptive but to pace itself with its competitors; and

3. MAS guided that it will cap its net gearing at 2x over the next three years despite the heavy new aircraft
delivery.

♦ Flights to Europe to resume today. MAS will resume its flights to Europe from today, as more airports in
major cities in Europe reopen with the threat of volcanic ash cloud from Iceland subsiding. While acknowledging
that there will be financial impact from the grounding of five aircraft for five days, MAS believes that it will be
mitigated by traffic backlog from the 46 cancelled flights with an estimated 15,000 passengers. MAS expects full
loads from flights out of European cities over the next 1-2 weeks.

♦ Fleet renewal plan not a re-rating catalyst. MAS took the trouble to highlight again the fleet renewal plan it
has put in place, i.e. to gradually phase out its existing leased older generation B747-400, A330-200, B737-400,
and used new generation A330-300 and B737-800 aircraft, replacing them with new generation A380-800 and
brand new A330-300 and B737-800 aircraft (see Table 2). However, it did acknowledge for the first time that the
move is not pre-emptive but to pace itself with its competitors. We did gather on the ground that MAS had been
losing its competitive edge in certain sectors over the last 1-2 years due to the lack of more advanced in-flight
entertainment facilities in its narrow-bodied aircraft. As such, we are more inclined to see MAS’s fleet renewal
plan as a neutral development, and not so much a re-rating catalyst. Incidentally, Business Times reported today
there is a possibility that MAS’s wholly-owned lost-cost unit Firefly may operate the B747-400 aircraft phased out
by MAS, for short-range domestic and regional routes out of the LCCT terminal of KLIA. We hold the view that
MAS should for the time being focus on its core full-service airline operation.

Table 2: MAS’s Fleet Renewal Plan

Aircraft Type Existing By FY12/16# Option
(Leased) (Leased Or Owned)
B747-400 6 - -
A380-800 - 6 -
A330-200 3 - -
A330-300 11 15 10
A330-300F - 2 2
B737-400 37 - -
B737-800 3 35 20
#On order
Source: Company

♦ Net gearing to peak at 2x in FY12/12. MAS guided that it will cap its net gearing at 2x over the next three
years despite the heavy new aircraft delivery. This target appears achievable. Based on our estimate, the firm
order in FY12/10-12 will cost MAS a total of RM10.9bn (assuming a 30% discount to catalogue prices). With net
cash and shareholders’ fund estimated at RM3.5bn and RM3.4bn respectively at present (having adjusted for
proceeds from the recent rights issue), ceteris paribus, MAS’s net gearing will only go up to 2.2x even MAS is to
own 100% of the new delivery up to FY12/12. In reality, we believe MAS will partially fund its new delivery with
leases that are off balance sheet.

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Table 3: Aircraft Delivery & Estimated Cost

FY Dec 2010 2011 2012 2013 2014 2015 Total
Aircraft delivery schedule
B737-800 2 4 5 13 10 1 35
A330-300/F 0 7 3 3 3 1 17
A380-800 0 0 6 0 0 0 6

Cost (RMm)#
B737-800 358 717 896 2,330 1,792 179 6,272
A330-300/F 0 3,136 1,344 1,344 1,344 448 7,616
A380-800 0 0 4,435 0 0 0 4,435
Total 358 3,853 6,675 3,674 3,136 627 18,323
Cumulative Total 358 4,211 10,886 14,560 17,696 18,323 -
#Catalogue prices of US$330m, US$200m and US$80m for A380-800, A330-300/F and B737-800,
US$1:RM3.20, cost at a 30% discount to catalogue prices
Source: Company, RHBRI

♦ Forecasts. Maintained.

♦ Risks to our view. These include: (1) A stronger-than-expected recovery in the air travel sector; (2) Lower jet
fuel cost; and (3) Effective containment of outbreaks of pandemic diseases.

♦ Road to recovery not without speed bumps. We believe the airline sector is poised for improved prospects in
2010, in line with the recovery in the global economy, but not without some speed bumps along the way such as:
(1) A mild rebound in the global economy will not materially stimulate demand for air travel; (2) Over the short
term, new capacity will continue to hit the market, intensify competition and capping yields; and (3) Rising crude
oil prices that will crimp margins. Indicative fair value is RM1.60 based on 14x FY12/10 EPS, in line with its
nearest comparable issue Singapore Airlines Ltd. Maintain Underperform.

Table 4: Earnings Forecasts Table 5: Forecast Assumptions

FYE Dec (RMm) FY09a FY10F FY11F FY12F FYE Dec FY10F FY11F FY12F

Turnover 11,309.9 12,283.6 12,259.2 12,201.9 Jet fuel cost (US$/barrel) 85 85 85

Turnover growth (%) -24.8 8.6 -0.2 -0.5 International load factor (%) 70 70 70
Domestic load factor (%) 70 70 70
EBITDA -312.4 722.5 862.1 983.6
EBITDA margin (%) -2.8 5.9 7.0 8.1

Depreciation -315.9 -280.7 -283.5 -286.3

Net Interest -84.5 -1.2 -17.9 -29.2
Associates 11.7 27.8 27.8 27.8
EI 1163.1 0.0 0.0 0.0

Pretax Profit 462.0 468.5 588.6 695.9

Tax 31.1 -84.3 -105.9 -125.3
PAT 493.1 384.1 482.7 570.6
Minorities -2.9 -2.7 -2.7 -2.7
Net Profit 490.2 381.4 480.0 567.9
Source: Company data, RHBRI estimates

IMPORTANT DISCLOSURES

This report has been prepared by RHB Research Institute Sdn Bhd (RHBRI) and is for private circulation only to clients of RHBRI and RHB Investment Bank Berhad
(previously known as RHB Sakura Merchant Bankers Berhad). It is for distribution only under such circumstances as may be permitted by applicable law. The
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This report has been prepared by the research personnel of RHBRI. Facts and views presented in this report have not been reviewed by, and may not reflect
information known to, professionals in other business areas of the “Connected Persons,” including investment banking personnel.

The research analysts, economists or research associates principally responsible for the preparation of this research report have received compensation based
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The recommendation framework for stocks and sectors are as follows : -

Stock Ratings

Outperform = The stock return is expected to exceed the FBM KLCI benchmark by greater than five percentage points over the next 6-12 months.

Trading Buy = Short-term positive development on the stock that could lead to a re-rating in the share price and translate into an absolute return of 15% or more
over a period of three months, but fundamentals are not strong enough to warrant an Outperform call. It is generally for investors who are willing to take on
higher risks.

Market Perform = The stock return is expected to be in line with the FBM KLCI benchmark (+/- five percentage points) over the next 6-12 months.

Underperform = The stock return is expected to underperform the FBM KLCI benchmark by more than five percentage points over the next 6-12 months.

Industry/Sector Ratings

Overweight = Industry expected to outperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Neutral = Industry expected to perform in line with the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Underweight = Industry expected to underperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

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