By Stephanie Jacob
Malaysia Airlines System’s (MAS) losses widened in the first quarter of 2014 (1Q14), as falling yields continued to affect its bottomline. The struggling national airline posted a loss of RM442 million in 1Q14 which was almost double the amount year-on-year (y-o-y) from the 1Q13.
Yield levels continued to be the most significant issue for the airlines and it nullified any improvements that were seen in the quarter, said analysts.
A RHB Research report noted that while available seat kilometer (ASK) levels expanded 19% y-o-y and eventhough MAS’ cost per ASK (CASK) fell 10% y-o-y – this was cancelled out by lower yields which fell by 9% y-o-y.
The research house noted that at MAS’ current yield factor numbers, it requires a breakeven load factor of 98.7% – for the quarter under review the airline only posted a load factor of 76.4%.
Kenanga Research highlighted that the loss came despite slim revenue growth of 4%. According to the Kenanga team, this came because revenue per ASK (RASK) declined sharply by 14% to 22.7 sen from 26.5 sen y-o-y.
Meanwhile MIDF Research noted that the losses were partly as a result of intensive competition across the industry. That said it also attributed the poor performance to what it called “MAS’ unsustainable ‘load active, yield passive’ strategy.”
This strategy basically involves heavy discounting to boost passenger numbers and subsequently, revenue. But experts suggest that this could backfire if the airline is unable to generate enough additional income from new customers to make up for income foregone from discounting.
Going forward, analysts were bleak in their outlook given the scale of the challenges the airline will need to overcome towards becoming profitable.
MIDF Research noted that the airline has already lost an important point of forward ticket sales after it pulled out of the Matta travel fair in March in the wake of the MH370 incident. MAS has also seen a significant decline in passengers from China in the immediate period following the incident with some routes experiencing a cancellation rate of as much as 60%.
Looking ahead the research outfit said it was expecting the impact of the unfortunate MH370 incident to be even more pronounced, primarily in 2Q14-3Q14. Overall it is raising its loss estimates for FY14 and FY15, by RM1.3 billion and RM800 million respectively.
MIDF Research suggested that with a current cash balance of RM3.4 billion it would not rule out “the possibility of another round of cash call within the next 24 months unless MAS undertakes a major restructuring exercise such as spinning-off some of its subsidiaries and cutting back some capacity to avoid further losses.”
The research house said it is reiterating its ‘sell’ call on MAS with a revised target price of 18 sen from 27 sen previously. The target price it premised on a lower 0.9x FY14 price-to-book value (P/BV).
Kenanga Research meanwhile is maintaining its ‘underperfom’ call on the airline, as it widens its FY14 to FY15 estimated loss assumptions to RM1.9 billion and RM1.4 billion respectively. It is also lowering overall yield (sen/revenue per kilometer) assumptions by 7% to 5%. Its target price for MAS is 14 sen, lower from its previous target of 16 sen.
It noted that it is switching its “valuation methodology from 6.9x FY14 EV/EBITDAR (enterprise value/earnings before interest, taxes, depreciation, amortisation and restructuring) to 1.2x FY14 P/BV valuation methodology, as we can no longer value the company using EV/EBITDAR post-earnings revision as it is at a negative level.”
RHB Research also revised its earnings estimates downwards, projecting that yields will fall by 8% versus the 5% estimated before. It is also lowering its capacity growth assumptions to 10% from 12% before for its FY14 forecast. These changes will result in a wider loss of assumptions of RM937.1 and RM766.3 for FY14 and FY15 respectively.
It is maintaining its ‘sell’ call on the airline, as it adjusts its fair value price down to 19 sen from 20 sen as a result of lowering its earnings estimates. The fair value price is based on 1x FY14 forecasted P/BV.
At the noon bell on Bursa Malaysia, the airline was trading up by half a sen at 21.5 sen.
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