KENANGA MAS - HOLD - 17 Mar 2008

Malaysian Airline System - High oil price threatens (Company Update)
Price: RM3.50
Target Price: RM3.90

Recommendation: HOLD


· Downgrade FY08 and FY09 net profit forecasts by 19% and 14% respectively as we revise our 2008 and 2009 oil price assumption upwards from US$85/barrel to US$95/barrel and US$90/barrel respectively, following the recent oil price spiked above US$110/barrel and similiar revision by the US Energy Information Administration (EIA).

· Oil price shot past the roof. WTI soared above US$100/barrel on 19 Feb and ended the week at US$110/barrel. Jet fuel surged even further to an unprecedented level of US$129/barrel at the time of writing.

· MAS has increased its FY08 fuel hedge to 43% requirement at US$89/barrel from 38% at US$84/barrel to mitigate the high oil price impact. Fuel expense makes up c.30% of MAS operating cost and remains the single largest operating cost component for airlines.

· Impact of high oil price to MAS bottomline however will be mitigated by: a) various cost reduction initiatives; b) increase in fuel surcharge; and c) strengthening RM. Our earlier analysis indicated that a 1% increase in fuel price assumption will cut FY08 net profit by 4%, all else equal. An 11% increase in oil price assumption to US$95/barrel should therefore slash our net profit by almost half! We are however cutting our FY08 net profit by only 19% as we opine that MAS will accelerates its' RM1b cost reduction initiatives and hike fuel surcharge to counter the rising oil pressure. The faster than expected appreciation of RM should help to provide some relief too.

· Challenging outlook for the sector as potential global economic deceleration and high oil price could act as a double whammy to airlines. MAS near term earnings however should be relatively resilient given its recent turnaround and ongoing restructuring efforts to reap various cost reductions benefits. Maintain HOLD but target price revised to RM3.90 based on FY08 PER of 11.5x following our earnings downgrade.





KENANGA INVESTMENT BANK BERHAD (15678-H)

Research Department