KUALA LUMPUR: CIMB Research yesterday upgraded Malaysian Airline System Bhd (MAS) to outperform from underperform, with a target price of RM3, based on six times the national carrier’s calendar year 2012 core earnings per share (EPS), revised from RM1.95 earlier.

Upon the upgrade, the stock rose as much as 11 sen or 5.7% to RM2.04, with nearly 13 million shares done. It closed at RM2.02 for a gain of nine sen or 4.66%.

MAS has received very few upgrades as analysts maintain their cautious view on the aviation industry that is still seeing low yields despite a recovery in passenger volume.

In a note yesterday, CIMB said the upgrade was premised upon a recovery in the industry and the potential “phenomenal” returns offered by MAS shares, which had hit bottom recently.

“We are upgrading our recommendation now because MAS’ massive RM2.7 billion one-for-one rights issue is already behind it and the share price has corrected some 20% to reflect the dilution.

“But analysts remain almost universally bearish hence recommendation upgrades will be very likely, in our opinion. As a result, we believe the share price has probably reached bottom and the news flow will become increasingly positive,” said the research house.

MAS is trading at trailing price-to-earnings ratio (PER) of 8.46 times versus AirAsia Bhd’s 5.76 times. MAS shares traded between RM1.80 and RM2.78 over the last 52 weeks. There is no forward PER for MAS given the consensus forecast of losses for the financial year ending Dec 31, 2009.

“We have used CY12 earnings as it better reflects MAS’ true potential, due to continuing core net losses in 2010 and shallow profits in 2011,” said CIMB.

Regional peers Singapore Airlines (SIA) is trading at about 16 times forward PE, Thai Airways at 7.31 times and Cathay Pacific at 17.36 times.

CIMB added that its valuation of MAS was reasonable against SIA’s S$17.90 (nine times CY12 core EPS) and AirAsia’s RM1.90 (six times CY12 core EPS).

“MAS is our top aviation pick because the earnings upside leverage over the next three years is far greater than for AirAsia,” the research house said.

Despite this, SIA and Thai Airways get more buy calls than MAS. Out of 16 calls, there are only three buys on MAS with the first coming from AmResearch on Oct 22, 2009 with a target price of RM3.50. TA Securities upgraded the stock to a buy on Feb 23 with a target price of RM2.50.

CIMB is positive on the stock due to the global economic recovery, which is being reflected in yield improvements across the aviation industry, and a structural reduction in airlines’ unit costs from 2011 due to fleet renewal.

“We think MAS can eventually reach RM4 over a two-year period, which translates into a price-to-earnings ratio of eight times.

“Our calendar 2012 earnings forecast is three times the current consensus estimate, and in our view it reflects MAS’ true potential once the structural transformation takes hold,” said CIMB.

It raised its earnings forecast for MAS in FY10 on the back of higher loads but FY11 earnings are lowered for higher aircraft ownership costs.  It expects MAS to be profitable in 2011 even though 40% of its fuel requirements have been hedged at US$100 (RM332) per barrel crude-equivalent.

CIMB is still forecasting MAS to post core net losses for FY10 but revised downward its net loss estimate from RM1.3 billion to RM1 billion.

However, RHB Research’s aviation analyst Joshua CY Ng said it was too premature to project an earnings recovery for MAS, or for any airline.

“It is still going to be challenging over the next three years. It is too premature to pop your champagne.

“Airlines may not see the levels in 2009, but this does not mean a fantastic growth either. It is going to be a slow recovery, with speed bumps along the way,” said Ng.

He said although there were signs of recovery in passenger volume, yields were still low. Yield is a measure of how much a passenger pays for every mile he travels and is an important indicator of an airline’s profitability.

“There will be an uneven recovery at best. Don’t forget throughout the year (2010), new capacities will be coming in,” said Ng.

“Those who have grounded their planes would put them back into the system. Jet fuel is also a major concern, as it accounts for 40% of operating costs.

“If oil prices continue to go up, fares will be expensive. Note that last year, it is the low fares that stimulated travel demand.”

RHB has an underperform call on MAS with a fair value of RM1.60.


This article appeared in The Edge Financial Daily, March 24, 2010.