HLG: 1 Apr 2008 Malaysian Airlines - Buying up to 55 B737-800 aircraft

Malaysian Airlines BUY



Price target RM7.00



Share price at 31 Mar RM3.54



Investment summary


MAS announced the purchase of up to 55 Boeing narrow-body planes valued at USD4.2bn at list price and agreed with Airbus on compensation and new delivery timetable for the 6 A380. We believe yesterday’s order for narrow-body aircraft and impending decision on wide-body aircraft will enable management to finalize its capital management policy. MAS is accumulating cash at an aggressive rate, and we expect FY10 net cash to easily reach RM8bn (RM4.80/share), before aircraft purchases. We have a BUY on MAS: (1) normalised pre-tax margins of 4% is low by regional standards (SIA 15-20%) and increase in yield creates a disproportionately strong EPS growth (2) revenue has been growing at a faster rate than cost, thanks to fare hikes and flat non-fuel cost (3) -27% share price YTD has fully discounted the growing competition from low cost carriers and global macro threats (jet fuel prices, economic slowdown).



Fleet renewal leads to capital management

We think MAS is a prime candidate for capital management (net cash of RM2.60/ share, 20% FCF yield), which could happen after management finalizes its fleet renewal program within the next few months.