Rights issue seen diluting MAS' earnings

Maybank Investment Bank Bhd (Maybank IB) said the rights offer will dilute MAS' earnings by 29 per cent in 2011 and has cut its call from "buy" to "hold".

HWANGDBS Vickers Research Sdn Bhd said however, the dilution for financial years 2010 and 2011 could be mitigated by potential earnings enhancement from capacity expansion.

"Based on ballpark estimates, there could be savings of RM71 million and RM156 million in financial years 2010 and 2011 respectively, from lease charges, which we have yet to factor into our earnings forecasts," it said in a report yesterday.

Standard & Poor's Asia Equity Research analyst Shukor Yusof said he is positive on the rights issue as it will help the national carrier manage its debt, given the cash it will require for its aircraft financing, which will remain heavy for the foreseeable future.
However, he expressed his reservations on MAS' plans to take delivery of its six superjumbo A380s.

"The A380s would be difficult for MAS to fully exploit as the aircraft cater for a very niche market," he told Business Times yesterday.

MAS on Tuesday proposed a one-for-one rights issue of 1.67 billion new units at RM1.60 apiece, stating that the proceeds will be used to partially fund the acquisition of wide-body aircraft and as working capital for its fleet renewal plans.

It also signed an agreement with European plane maker Airbus for an order of 15 A330-300s with options for another 10. This is on top of the A380s and 35 B737-800s slated to come in from the last quarter of 2010.

OSK Research Sdn Bhd said the issue of new shares will boost the company's shareholders funds from a mere 14 sen per share as at November 30 2009 to 86 sen, thus reducing the risk of MAS entering into PN17 status.

"The flush market liquidity that has held up the company's share price at relatively high levels also offers a good avenue to raise funds at attractive valuations. The decision to partly own aircraft is also more economical relative to leasing," it said.

But the local research firm is unenthusiastic over the written irrevocable undertakings from Penerbangan Malaysia Bhd (PMB) and Khazanah Nasional Bhd to subscribe in full for their legal entitlements.

"Based on our computation, the transaction is almost a zero sum game for PMB and Khazanah," it said, adding that the total net cash flow from the underwriting could be a mere RM176 million.

The figure was derived after including the payments made by MAS to PMB for the purchase of the six A380s and bundling of the four Boeing planes.

While OSK Research said it was good that MAS was shoring up its financial position and setting its long-term business direction, these corporate actions involve a long gestation period.

It is maintaining a "sell" call, with a target price of RM2.

MAS shed 2 sen to close at RM3.03 yesterday.