05 May 2012

MAS net gearing could surpass its current 4.4 times as MAS seeks funding for scheduled delivery of RM3.5bil aircraft by its 2013 financial year - Kenanga and HwangDBS Analysts

With the unravelling of the Malaysia Airlines (MAS) and AirAsia Bhd share swap exercise, analysts said that competition in the aviation industry would intensify again.

AirAsia opened 13 sen lower to RM3.20 before bouncing back up to an intraday high of RM3.65 by 10.28am.

It closed the day up 27 sen to RM3.60 on volume of 13.76 million shares. AirAsia's various call warrants also dominated the volumes list for the day, all finishing the day between 40% and 50% higher.

Meanwhile, MAS also soared, touching an intraday high of RM1.34 in early trading. The price started weakening before closing at RM1.24, up two sen on volume of 9.24 million shares from the previous trading day.

“Investors were at a loss and didn't know what to think of AirAsia initially. Perhaps after digesting the news and realising that AirAsia was no longer strained by MAS, they started buying up the shares,” said one dealer who tracked AirAsia.

OSK analyst Ahmad Maghfur Usman said that promotional and discount offerings on air fares would be more aggressive going forward as both airlines strived to expand market share though competition and the consumers were expected to benefit the most.

“We think the share swap reversal could boost the sentiment on AirAsia as foreign investors prefer the low cost carrier operator as a standalone business entity without any link to the Government. Investors will also be pleased by the fact that Tan Sri Tony Fernandes could now fully focus on being the group CEO of AirAsia,” added Ahmad.

Khazanah Nasional Bhd and Tune Air Sdn Bhd have reversed the share swap exercise which took place in August last year. The deal involved Khazanah exchanging a 20.5% stake in MAS for 10% in AirAsia. As part of the reversal, Fernandes and Datuk Kamarudin Meranun resigned from MAS' board while Datuk Mohamed Azman Yahya quit from AirAsia's board.

Although the share swap had been reversed, both airlines agreed to collaborate on specific areas with the signing of two memoranda of understanding (MoU) for joint maintenance services and the establishment of a special purpose vehicle. This would be 50%:35%:15% owned by MAS, AirAsia and AirAsia X respectively to extract procurement synergies such as fuel oil, aircraft components and parts.

“With the swap reversal, the collaboration would not be as strong as initially structured. However, both airlines could see benefits from areas under the MoUs. In particular, joint procurement of fuel oil could see cost savings, given the sizeable combined requirements of the two groups,” said an analyst from HwangDBS.

Meanwhile, Ahmad expects AirAsia to benefit from higher yields during the first four months of 2012, pointing out that since the collaboration was proposed, MAS was cutting capacity for both its domestic and international routes.

MAS was unlikely to reinstate Firefly's Sabah and Sarawak routes in the immediate term and AirAsia's yield momentum would continue, although at a moderating pace, he said. This was given the possible risk that MAS would discount its fares more aggressively moving forward to protect its market share.

It's however bad news for MAS.

A Kenanga analyst said that it would not be a smooth ride forthe national carrier. In terms of its business fundamentals, the analyst felt that the collaboration could be positive for MAS, but only in the longer term as it would take a while to feel the accumulated impact arising from potential cost savings.

“In the meantime, MAS is not travelling along a smooth path in terms of turning around amidst global economic uncertainties and high jet fuel prices, not to mention it also has to finance its RM3.5bil aircraft by its 2013 financial year,” said the Kenanga Research analyst.

Ahmad said that with MAS' union having resisted efforts by management to turnaround the national carrier by forming a collaboration with AirAsia, uncertainties remained over the commitment of its workforce towards adopting positive changes going forward.

“Our fundamental view on MAS remains unchanged. It is facing turbulent times amid an environment of high jet fuel prices and intensifying competition. The airline will need to compete with AirAsia once again,” said Ahmad.

Khazanah has released a statement announcing that the share swap, which was designed to align the interests of the major shareholders Khazanah and Tune Air, had become a distraction to management's efforts to turn around MAS. The cancellation of the share swap was sparked by strong resistance from the 20,000 employees of MAS' unionised workforce.

“We are concerned about MAS' stretched balance sheet. Net gearing could surpass its current 4.4 times as MAS seeks funding for scheduled delivery of aircraft. In our view, the operating environment for airlines remains challenging due to stubbornly high oil prices, which could dampen passenger travel demand,” said the HwangDBS analyst.

Source: www.thestar.com.my


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