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Saturday, March 30, 2013

MAS Problems Stem From Bad Management

Malaysian Airline System Berhad is engaged in the business of air transportation and the provision of related services. It operates in two segments: airline operations, which is engaged in the operation of aircraft for passenger, and cargo services, which is engaged in the operation of aircraft for cargo and mail services. Its other business segment includes catering, engineering, computerized reservation services, trucking and warehousing services, retailing of goods, terminal charges, and tour and travel related activities.


Price: RM0.765

Target price: None  
based on negative EPS and average industry PE range of 16

Fundamentals: Not Meaningful
Technical: Not Meaningful
Risk Level: Very High

**Outperform: Stock expected to do better than market return; has upside or cheap vs target price. Usually a buy call.
**Market perform: Stock expected to be on neutral, can be + - 3% to 5% either way; Usually a hold call.
**Underperform: Stock expected to do worse than market return; has downside or too expensive to buy vs target price. If fundamentals change a sell call.

Malaysia Airlines Join Oneworld Alliance

Unlike investment banks or research houses, I do not invest in highly risky endeavors nor do I want to play the trading game. IB and RH have their roles and place in the financial market, they analyze securities and do recommendations based on up to date data & make educated assumptions for estimates and forecast. I however have my own set of investing theories & one of those is to simply avoid bad companies. I can do with good and 'decent' companies given the risk involved of course. Luckily Proton has delisted if not it would receive bashing too from me here. I am pretty sure MAS will be consumed by Syed Mokhtar in the end due to political reasons, I just don't know when. Shady deals like this go unnoticed until the very last minute. 

MAS is a major player in the intercontinental and wide body airlines sector. Malaysia Airlines currently flies to 90 international destinations over six continents. Some of Malaysia Airlines prized routes include to London Heathrow , Tokyo Narita, King Abdul Aziz Jeddah, Paris Charles De Gaulle  and Dubai. If Thai airways, SIA and Cathay can make money why not MAS? It is because of BAD MANAGEMENT (poor hedging against fuel prices & terrible cost control). There's a lot of drama in MAS (see this link) and won't bother putting it all here. My goal is to show you how the stock looks like from a financial side.

Fundamental Analysis
Revenue/EPS: CAGR of ~-200%. There is no growth in profit over the last 5 years.
Dividends: 0%. It does not have a dividend payout ratio as well.
Debt-to-equity Ratio: 5.44. This is the highest ratio I have seen in my investing experience. For a high capex industry this level of debt is horrendous (bad management).
Liquid asset-to-share Ratio: 0.33. 
Very little cash in hand, barely to enough to service debts. Can you imagine having RM0.33 but you owe your friend RM5.44.
Return on Capital Employed: -242.22% in 2011. Keep buying planes but yet to prove it can make any money and it is still buying more.

****For more information download my worksheet from my dropbox: Aboi_Hybrid_PEGGY_method
Can you see how depressing our National Carrier is

Technical Analysis
Don't bother because the EPS is negative due to losses, regardless of the PE ratio, the computed target price is always RM0. As such I have no interest in seeing the technical side without strong or at least decent fundamentals. For the year 2013, MAS is expected to return to the black albeit with very little profit. The business turnaround plan has been in motion since 2012 and produced some decent results, however investors are not convinced yet as evident from the dismal share performance.

In The News
**The following taken from Maybank Research 01/03/2013**

In line. Malaysian Airline’s (MAS) FY12 core net loss of MYR571m (- 45% YoY) was in line with ours, but outperformed consensus estimate of >MYR700m loss. The Company has managed to stem losses since 3Q12 and has appeared to turn the corner in terms of a successful business turnaround. We maintain our BUY call, but with a lower target price of MYR0.97/share (previously MYR1.02/share) after tweaking our average fuel cost assumption to USD126/bbl from USD125/bbl, based on 2014 7.2x adjusted EV/EBITDAR – in line with regional average.

4Q12 was encouraging. 4Q12 reported net profit of MYR51.8m was significantly better than 4Q11’s loss of MYR1,276.9m. The drivers were better yields and load factors achieved. Unit cost has risen by 0.7% YoY due to higher overheads and business restructuring costs. More importantly, operating cashflow of MYR35.3m affirms that the business has turned around and is generating positive returns.

MAS will grow modestly in 2013. MAS will have a net reduction of six aircraft in 2013 (dispose 22 aircraft and receive 16 new aircraft). This fleet rejuvenation exercise will bring down its average fleet age to ~7 years – which is similar to industry leaders such as Singapore Airlines and Emirates. Capacity will likely remain flattish despite the lower fleet size, as MAS will boost utilization rates on the new aircraft.

Outlook remains challenging. Management states the competitive environment is challenging, and yields are soft. Regional sectors (ASEAN, China, India) are performing better relative to long-haul routes, and this is where MAS will focus its growth strategy.

BUY with a lower target price. We have cut our earnings forecasts for FY2013-14 by -5.5% and -3.1% respectively, after raising our average fuel cost assumption to USD126/bbl, up by USD1/bbl from USD125/bbl previously. Despite our bullish view, we think the stock will trade sideways until the rights issue is completed in Apr 2013.
**End of The following taken from Maybank Research 01/03/2013**

Disclaimer: The reports, analysis and recommendations in this blog are solely my personal views. I do not link to any investment body or company. As such, I will not be responsible of any of your investment decision. Consult your investment adviser or come to your own conclusions before making any investment decision.

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