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Wednesday, October 9, 2013

Kenanga upgrades MAS to Market Perform (Star)

Kenanga Research is upgrading Malaysian Airline System Bhd to Market Perform from Underperform with a higher target price of 35 sen even as it revises earnings estimate downwards, saying it believes MAS is on the right path to recovery.

The research house’s previous FY13-14 net profit estimates of RM15.9mil and RM467.5mil have been changed to net loss forecast of RM693.2mil and RM293.9mil.

“To recap, MAS managed to narrow its 1H13 core net loss from RM561.4mil to RM542.6mil, underpinned by a stronger revenue growth of 11%. However, we are reducing our FY13E and FY14E earnings estimate to a net loss, as our previous yield assumptions were overly aggressive.

“However, we believe that given a stronger second half in 2013, MAS would be able to record a better set of results as compared to 2012,” Kenanga said.

According to Kenanga, MAS’s year-to-date (August) load factor had seen significant improvement of 6.6 percentage points from 73.6% to 80.2%, while its passenger numbers improved 27% as MAS registered 10.9 million passengers from the previous 8.6 million, driven by aggressive promotional activities for both domestic and international routes.

It said MAS’s strategy was the correct one as it had clearly shown results in winning back customers. And now that MAS was filling its planes, it should now focus on achieving better operational efficiencies to bring down operating costs.

“The next step would be improving its overall yield; MAS could possibly focus on maximising its profitable ancillary/subsidiary business i.e. insurance, administration fees, security charges, Firefly (which turned profitable in 2012 since it stopped its jet operations), or pass on the bulk of its jet fuel costs to passengers through fuel surcharges,” Kenanga said.

We switched our valuation methodology (from price-earnings ratio to EV/EBITDAR) to better reflect improving operational performances albeit expecting a longer timeframe for ironing out cost issues before MAS turned profitable.

“However, now our target price carries earnings risks as their bottomline remains volatile,” Kenanga Research said.

MAS closed trading Tuesday at 34 sen.

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