KUALA LUMPUR: OSK Investment Research has revised downwards the FY09 and FY10 projection for Malaysian Airline System Bhd (MAS) to a net loss of RM291.7 million and net profit of RM168 million respectively.

 The revision was due to the tough business environment and huge realised and unrealized hedging losses suffered by the national carrier.

“Although the company justifies a premium based on the track record of its present management, for which we value the company based on 20 times earnings per share (EPS) and 4.0 times net tangible asset (NTA) on FY10 figures, the fair value of RM2 prompts our SELL recommendation,” it said.

OSK Research said MAS was once again experiencing a “triple squeeze” from yield pressure from the removal of fuel surcharges and lowering of airfares, load pressure arising from lacklustre demand, and cost pressure from hedging losses.

Despite the fact that MAS has cut capacity by 11.8% in the form of Available Seat Kilometre (ASK), the load factor numbers were shocking as domestic load came in barely above 60% and international at 55.6%.

Lower traffic, load and yield dragged MAS into its first operation loss of RM138.4 million since 3Q06. Including the derivative loss of RM557 million on early adoption of FRS139 standards, the reported loss ballooned to RM695.4 million.

MAS adopted FRS 139 to allow it to be directly comparable to most airlines and to improve transparency. The standard requires recognition of financial instruments initially at fair value and subsequently measures them at the balance sheet date.

As the company adopts a competitive fuel hedging policy, the unprecedented plunge in fuel prices translated into a RM3.3 billion mark-to-market (MTM) loss and a negative shareholder equity of RM458 million as at March 31, 2009 although these contracts will mature over a next three-year period.

Nevertheless, MAS was granted a conditional waiver from PN17 status as the group’s operations remain robust and it is still a “going concern”

The International Air Transport Association (IATA) has revised its forecast for the airline industry to lose more than US$9 billion and projected for passenger and cargo demand to fall sharply. This is further compounded by the threat from the Influenza A (H1N1) virus outbreak.

“Although we expect MAS to make a comeback, especially in view of the track record of its current management, the recovery may be gradual. The rebound in the crude oil price in line with our house estimate of US$70 per barrel may eventually translate into RM1.884 billion in realised losses if crude oil price were to move within a small range at this level,” it said.