A much-needed restart of Malaysia Airlines (MAS) will have major positive outcomes on Malaysia’s airline sector, with AirAsia bhd poised to be the safest and clearest beneficiary of any such restructuring, said CIMB Research.
According to StarbizWeek’s recent report that MAS’ senior management team had been informed of a plan to reset the airline, it acknowledged that “the market is well aware that such open heart surgery is what MAS needs”.
According to the report, an announcement on the new plans may be made by the end of the month, pending board and shareholder approval, and that the implementation of a scheme looks favourable in July.
CIMB Research said such a plan could involve a court order for creditor protection, possibly bankruptcy, to enable MAS to renegotiate its contracts with suppliers and the terms of employment for staff and crew, as well as a general reduction in its headcount.
It is suggested that MAS could be save from itself if there was new political will to reform and that its forecasts, target price and even recommendation might be raised.
It added that derating catalysts include MAS’ stubborn losses.
CIMB Research said the forecast assumed that industry-average yields would continue to fall in financial year 2014 (FY14) vs FY13, but that a slow recovery was expected in FY15-FY16, as such low yield levels were unsustainable for the Malaysia-based short-haul airlines.
But in view of the Government’s unwillingness to support MAS further and in the aftermath of the disappearance of flight MH370, it said the possibility of a capacity cutback to mitigate immediate-term cash burn may be coming up and was a move which can only benefit AirAsia.
It also said this could cause industry yields to stabilise or even increase on a year-on-year basis during the second half the year.
“If this happens, it will be ahead of our expectations, and also the expectations of the street, in our view, and could be a powerful trigger to AirAsia’s share price,” it said.
Following this, the research house has upgraded AirAsia to add from hold, with a target price of RM2.88 — a 20% premium to its liquidation value from RM2.40 at liquidation value. AirAsia increased give cents to close at RM2.26 on Monday.
The forecasts has been left unchanged for now, but it highlighted the potential for a substantial yield and earnings upgrade if MAS reduces its capacity deployment.
It held its “hold call” on AirAsia X, despite it also being a major beneficiary of MAS cutbacks, with a target price of RM0.85 (1.5 times CY14 P/BV, average since IPO) due to its riskier earnings and thin profit margins. AirAsia X saw an increment of 0.5 cents to close at 75.5 cents on Monday.
If the government decides to pump more money into MAS next year, CIMB Research said AirAsia’s yields would stay at the current low levels.
However, it said yields in Malaysia were already so low that both airlines had said fares were unlikely to go lower sequentially from where they ended in late 2013.
“Furthermore, AirAsia’s share price is already below its asset liquidation value, and that is not even counting the value of its brand and its sustainable competitive advantage. So, there is significant downside protection for investors in our view,” it said.
It acknowledged that a potential negative development that could hurt AirAsia’s yields was the possibility of a hike in KLIA2’s tariffs after May 2015.
However, if MAS rationalises its capacity deployment, pricing power might return to the airlines and increase their average yields, allowing AirAsia to pass through the higher passenger service charges.
Given this, CIMB Research has maintained its “neutral” sector call while upgrading AirAsia to “add”.