AmResearch rates MAS a 'sell', cites challenging outlook

Both yields and load factors could come under pressure given the imminent liberalisation of Asean skies from the end of this year, says the research house

AMRESEARCH Sdn Bhd initiated coverage on Malaysia Airlines (MAS) yesterday with a 'sell' call due to the challenging industry outlook.

The research house set a target price of RM2.96 per share, with valuations based on a forward price to earnings of 10.5 times for financial year ending 2009.

AmResearch said MAS' passenger load factor for the first six months of 2008 was down 2.4 per cent to 68.1 per cent from the previous corresponding period.

It added that although MAS had turnaround successfully, more time was required for it to catch up with other regional full service carriers in the premium market segment and compete for growth rather than mere survivability.

Also, passenger traffic contraction this year came largely from its international routes whereas domestic routes grew 3.5 per cent. The research house added that while MAS yields hovered around the industry average, it may not be sustained moving forward.

"In fact, both yields and load factors could come under pressure given the imminent liberalisation of Asean skies from the end of this year which means rapid incoming capacity into the region at a time of faltering demand," the report said.

AmResearch also said that MAS was the only airline among its competitors to consistently experience negative year-on-year revenue-passenger-kilometre growth throughout the year.

While it highlighted that MAS has remained profitable amid the industry crisis, AmResearch expressed concern on the sustainability of MAS' current cost- cutting strategy and the impact it could have on future demand and branding of MAS products.

AmResearch also added that MAS' string of fuel surcharge hikes could cause further damage to its load factor and passenger traffic.

AmResearch expects a 42.3 per cent drop in earnings for financial year ending 2008 but a 46.4 per cent improvement to RM473 million for the subsequent fiscal year. This is based on expectations of lower fuel prices at an average of US$95 per barrel against US$100 per barrel for FY08.