jpmorgan: 4 mar Tranmil ( underperform)

• Transmile held a rare post FY07 results analyst briefing following a full year performance that featured significant losses from kitchen sinking. Clearing out the one-off items, EBITDA came in at M$5MM vs our expectations of M$17MM and compared to M$73MM last year. The squeeze in operating profits was almost entirely due to fuel cost pressures despite progress in cutting some unprofitable routes.

• Management has begun to articulate the rehabilitation plans for Transmile which ironically involved going back to its roots as an Asian-centric regional feeder airline. This will involve eventually stopping most or all intercontinental routes, namely the China-US MD11 service which is facing severe competition from
the China open-skies policy and cut-throat competition from excessive belly space from passenger airlines.

• We see no option but for Transmile to sell its MD11 fleet particularly since it is generating negative EBITDA on the intercontinental routes. The company will also be pressed to raise cash given that current operations cannot service existing or future
debt and there is an impending put option on the outstanding 2010
M$228MM CBs in May 2008.

• We are cutting our Dec08 PT from M$2.94 to M$1.59. The break-up value of the company has been lowered because it was revealed that the market value of the MD11s is M$43MMM$ 47MM, rather than the M$75MM we estimated previously. Upside risk to our PT is an M&A or privatization event.