26 April 2012
OSK Research maintains 'Sell' call on MAS despite recommending a "buy" on Malaysia Airlines' (MAS) redeemable convertible preference shares (RCPS) for short-term gain
(MAS opening stock price today (26.4.2012) was RM 1.23)
OSK Research Sdn Bhd is recommending a "buy" on Malaysia Airlines' (MAS) redeemable convertible preference shares (RCPS) for short-term gain.
The RCPS are currently trading at 93.5 sen to a RM1 redemption at maturity on October 30 2012.
Despite concerns on whether MAS will be able to honour the redemption, OSK Research considers the possibility to be low as a default by MAS will tarnish its credibility and impact the overall Malaysian capital market.
The RCPS issue was priced at RM1 each with a conversion period of four years, at a conversion price of RM3.09, starting from one year after the issue date.
It was to have paid a dividend (out of post-taxation profits) of 3 sen per year and MAS has so far paid such dividends only twice, due to its volatile earnings.
"We are of the view that RCPS shareholders will still see their rights to a RM1 redemption being honoured by MAS, which implies an immediate upside gain of 6.9 per cent (14 per cent annualised) upon maturity," OSK Research said.
However, the research house maintains its sell call on MAS.
Its fair value remains at 90 sen, based on an enterprise value/earnings before interest tax depreciation and amortisation of eight times financial year 2013.
"Our greatest concern is how much cash burn to expect in the immediate term, given its onerous capital expenditure and the challenging environment amid stubbornly high jet fuel prices and sluggish demand," the firm said.
It sees the likelihood for the national-flagged carrier to call for another round of a rights issue increasing, as its credit facility dries up.
Furthermore, there are risks that its collaborative framework with AirAsia Bhd could be called off due to strong resistance from its unionised workforce.
If this happens, MAS will be negatively impacted over the longer run as more headwinds are expected from the intensification of competition ahead of the open sky policy.