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AirAsia to benefit from any restructuring of M'sia Airlines

Publication Date : 14-05-2014

 

A much-needed “reboot” of Malaysia Airlines (MAS) will have major positive repercussions on Malaysia’s airline sector, with AirAsia Bhd poised to be the safest and clearest beneficiary of any such restructuring, said CIMB Research.

Referring to StarBizWeek’s recent report that MAS’ senior management team had been informed of a plan to reset the airline, it noted that “the market is well aware that such open heart surgery is what MAS needs”.

The report said that an announcement on the reset plan may be made by month’s end, pending board and shareholder approval, and that the implementation of a scheme was likely to be in July.

CIMB Research said such a plan could involve a court order for creditor protection, possibly bankruptcy, to enable MAS to renegotiate its contracts with suppliers and the terms of employment for staff and crew, as well as a general reduction in its headcount.

It opined that MAS could be saved from itself if there was new political will to restructure, and that its forecasts, target price and even recommendation might be raised.

“But the path forward is risky and, given the many disappointments over the past 14 years, we are not jumping to conclusions,” it said in a sector flash note on Monday, retaining its loss forecast for MAS with an unchanged “reduce” call and low target price of 0.14 ringgit (US$0.04) based on a one times calendar year 2014 (CY14) price-to-book value (P/BV). MAS closed unchanged at 21 sen on Monday.

It added that derating catalysts include MAS’ stubborn losses.

CIMB Research said its current forecast assumed that industry-average yields would continue to decline in financial year 2014 (FY14) vs FY13, but that a gradual recovery was expected in FY15-FY16, as such low yield levels were unsustainable for the Malaysia-based short-haul airlines.

But in view of the Government’s reluctance to support MAS further and in the aftermath of the MH370 jet disappearance, it said the possibility of a capacity cutback to mitigate immediate-term cash burn “may be imminent” and was a move which “can only be positive for AirAsia”.

Additionally, it said this could cause industry yields to stabilise or even increase on a year-on-year (y-o-y) basis during the second half of the year.

“If this happens, it will be ahead of our expectations, and also the expectations of the street, in our view, and could be a powerful trigger to AirAsia’s share price,” it said.

Given this, the research house has upgraded AirAsia to “add” from “hold”, with a target price of 2.88 ringgit (a 20% premium to its liquidation value), from 2.40 ringgit at liquidation value. AirAsia was up five sen to close at 2.26 ringgit on Monday.

It has left its forecasts unchanged for now, but highlighted the potential for a significant yield and earnings upgrade if MAS cuts back on its capacity deployment.

It retained its “hold call” on AirAsia X, despite it also being a major beneficiary of MAS cutbacks, with a target price of 0.85 ringgit (1.5 times CY14 P/BV, average since IPO) due to its riskier earnings and thin profit margins. AirAsia X rose 0.5 sen to close at 75.5 sen on Monday.

Should the Government decide to pump more money into MAS next year, CIMB Research said AirAsia’s yields would remain at the current low levels.

However, it said yields in Malaysia were already so low that both airlines had said fares were unlikely to go lower sequentially from where they ended in late 2013 (although fares will likely still be lower y-o-y in first quarter 2014 vs first quarter 2013, as the fare deflation started in earnest only from the second quarter last year).

“Furthermore, AirAsia’s share price is already below its asset liquidation value, and that is not even counting the value of its brand and its sustainable competitive advantage. So, there is significant downside protection for investors in our view,” it said.

It noted that a potential negative development that could hurt AirAsia’s yields was the possibility of a hike in KLIA2’s tariffs after May 2015.

However, if MAS rationalises its capacity deployment, pricing power might return to the airlines and increase their average yields, allowing AirAsia to pass through the higher passenger service charges.

Given this, CIMB Research has maintained its “neutral” sector call while upgrading AirAsia to “add”.

*US$1 = 3.23 ringgit

 

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