MAS plan lacks critical details?

Friday December 9, 2011

Analysts: MAS plan lacks critical details

By SHARIDAN M.ALI
sharidan@thestar.com.my

PETALING JAYA: While analysts are generally positive about whatMalaysia Airlines (MAS) aspired to achieve in its turnaround plan, they also voiced concern over the lack of critical detail on execution of the plan in the midst of challenging market environment.

Maybank Investment Bank (IB) said the business plan document was a fairly good “academic” paper but it lacked details on execution.

“We feel that this is the key factor that investors want to hear in order to be convinced about the business turnaround story,” it said in a report.

Maybank IB was also concerned about the risk of MAS starting a new airline for regional services.

“MAS will start a new regional airline focused on the premium segment by second half of 2012 and it will gradually dissipate to become a long-haul airline only as its regional services are taken over by the new airline.

File picture shows MAS and AirAsia aircraft at Kuala Lumpur International Airport. - EPA

“Although the management asserts that the new airline would have significantly better quality and services, we see a risk as MAS has a strong brand name with proven quality and service.

“For an airline that aims to turnaround and stem losses, this is not a suitable time to take start-up risk, in our view,” it said.

Nevertheless, Maybank IB applauded the move that MAS would cut capacity or available seat per km (ASK) by 12% in 2012, on loss making routes such as Buenos Aires, Dubai, Cape Town and Johannesburg. “The move was overdue for decades as these routes have no chance to make money. This move is also a confidence booster because it shows that the management is bold and clear minded in its cost cutting approach,” said Maybank IB.

On Wednesday, troubled the airline unveiled its third edition of business turnaround plan that entailed cuting unprofitable routes, spining off its ancillary units, exploring joint ventures with other airlines and launching a regional carrier in a bid to return to profitability by 2013.

The airline, which would focus on offering premium air services, targeted a net loss of RM165mil for 2012. However, by 2016 it hoped to report a net profit of RM900mil.

Meanwhile, OSK Research said the plan shed some light on the strategies lined up to turn the national carrier around by cutting capacity, wooing back its customers, enhancing costs, and focusing in its core business.

However, they were still skeptical as MAS faced tough challenges amid growing competition.

“There are also concerns about potential funding for its RM6bil capex, which could burden the flagship carrier with a gearing of four times by end of 2012.

“But, management reassures that as long it is able to achieve positive Ebitda (earnings before interest, tax, depreciation and amortisation) in first half of 2012, this would not be an issue. We believe this is achievable as long the airline executes its strategies well,” it said.

AmResearch said while it was positive on MAS' business plan from a structural perspective, it believed it was too early to be bullish on the stock given the muted earnings visibility as a weak global economy in 2012 would not support air travel where loads and pricing power were negatively affected, particularly for premium travel.

“There is also the risk of a cash call to support fleet renewal, which is central to MAS' business plan, if profitability and cash flows do not improve as much as expected,” it said.

Both AmResearch and Maybank IB maintained a “hold” call on the stock while OSK Research retained its “sell” call.