KUALA LUMPUR: Malaysian Airline System Bhd (MAS), which has been aggressively discounting fares to woo passengers, might have seen the worst of the economic downturn given its third-quarter results that were announced last week, research houses said.

With the narrowing of operating losses, analysts are convinced that MAS is on its way to recovery but are mixed on when it could stop cutting fares to allow yields to pick up.

Some analysts believe that discounting of fares has plateaued while others say it would take at least “another quarter or two” before average yield could return to break-even level. Regardless, the prospect of recovery is enough to prompt Maybank Investment Bank Bhd (Maybank IB) to upgrade the stock to a buy from sell, with a higher target price of RM4.20 from RM2.50.

The price pegs MAS at an unchanged 5.5 times 2010 enterprise value/earnings before interest, tax, depreciation and amortisation (Ebitda) in line with regional peers, with a possible return to operating profit a near-term catalyst.

“Profitability is within reach as it continues to grow in profitable pockets whilst slashing costs from loss-making routes,” the research house said in a note last Thursday.Furthermore, it recommended a switch to MAS from Malaysia Airports Holdings Bhd (MAHB), which has long been the favourite pick in the industry.

“Switch to a more highly-leveraged exposure to the global economic recovery after a recessionary 2H08-1H09, from defensive MAHB,” it added.

Maybank IB said there were no near-term catalysts for MAHB as it grappled with its new KLIA-LCCT expansion and started its new reward scheme for airlines.

The research house also noted that MAS’ filled capacity or revenue passenger km had returned to 3Q08 levels, while the 77% passenger load factor was at an eight-year high, implying an improved competitive position and general economic recovery.

It said MAS’ cargo division also firmed, as total cargo carried was only 1.6% lower year-on-year. Based on latest data, it appears that MAS would most likely see less-than-expected losses for the fiscal year ending Dec 31, 2009.

RHB Research Institute said if MAS’ 4Q net loss matched that of 3Q, full-year normalised net loss would come in at RM798.5 million, which would be lower than its initial forecast of RM805 million.

It has tagged an indicative fair value of RM1.56 on MAS, based on 14 times FY10 earnings per share that is in line with its nearest comparable Singapore Airlines Ltd. RHB maintained an underperform call on MAS.

OSK Research said the airline had guided for better forward bookings for 4Q. MAS’ books show that its payables, of which more than 90% are attributable to forward ticket sales, stand at a healthy RM2.3 billion.  

OSK also noted that the company continued to add capacity on profitable routes such as those for domestic and Asean destinations.

Nevertheless, it is still cautious on MAS’ short- to medium-term performance given that overall yields of 22.4 sen in 3Q were still 4.3% lower quarter-on-quarter.

“As such, we suspect it may take at least a quarter or two before average yield returns to breakeven level,” it added.

OSK said the scheduled delivery of new aircraft could also suggest a potential cash call that might eventually “dampen” investor sentiment.

Interestingly, Maybank IB, RHB and OSK’s earnings estimates for MAS’ FY09 are better than market expectations.

Based on Bloomberg data, the consensus for FY09 is a net loss of RM923.87 million and operating loss of RM856.12 million.

Maybank IB forecasts a net loss of RM764.6 million for MAS for FY09, OSK projects a loss of RM839.8 million while RHB has estimated a net loss of RM805 million.

For the third quarter ended Sept 30, 2009, MAS posted a net loss of RM299.62 million versus a net profit of RM38.09 million a year earlier, while operating loss was RM73 million versus operating profit of RM44 million. Revenue dipped 28% to RM2.96 billion from RM4.12 billion. The stock closed seven sen lower at RM3.17 last Thursday.


This article appeared in The Edge Financial Daily, November 30, 2009.