CIMB:MAS (OUTPERFORM, TP: RM9.85) - Corporate day highlights - Making progress

Malaysian Airlines' ED/CFO Tengku Dato' Azmil presented at our Corporate Day conference yesterday. Here are the key highlights.

1. Head honchos may want to remain after contract expiry. Both Tengku and Managing Director Dato' Sri Idris Jala's three-year service contracts expire at the end of this year, but are probably interested to renew their contracts, subject to negotiations.

2. Cost management.
MAS adopts a competitive fuel hedging policy, benchmarked against its competitors' average hedged price and proportion locked in. For FY08, it has secured 38% of its fuel requirements at WTI US$84/barrel.
Efforts to reduce fuel consumption will continue by mining data on a micro level, and benefits should accrue in 2008.
Other costdown initiatives include the renegotiation of the pricing in contracts that have expired.

3. Squeezing productivity growth by reducing turnaround times.
Despite the lack of new aircraft, MAS is squeezing productivity from its existing fleet as a means to generate capacity growth. This is achieved from reducing turnaround times.
A decision on narrow-body fleet renewal is imminent, after nearing completion its detailed cost analysis.

4. Talks with American, Indian, and Turkish carriers continuing to expand its hub-and-spoke strategy.

5. Maintain OUTPERFORM and target price of RM9.85, based on an unchanged P/E target of 10x.
We emerge from the Corporate Day presentation confident about MAS's restructuring story, although rising oil prices may dampen earnings growth in the near term.
MAS said that the effects of the US economic slowdown are imperceptible at this point.
The key catalyst is earnings growth as restructuring takes root. Fuel costs remain high in 2008 but MAS will benefit from a reduction in sales commissions and continued yield enhancement for the passenger business.