HLG: 25 March 2008 MAS - Buy for the cashflow

Malaysian Airlines BUY



Price target RM7.00



Share price at 24 Mar RM3.48



Investment summary


We initiate coverage on MAS with a BUY: share price has fallen –29% YTD, implying an ex-cash FY07 PE of 3x, vs. 8-9x for regional peers SIA/Cathay. Despite cheap valuations, we think MAS’ near-term earnings are biased upwards: (1) normalized pretax margin of 4% is low by regional standards (SIA is 15-20%), and modest increases in passenger yield create 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) MAS benefits from USD depreciation, at a rate of +RM60m (8% of consensus FY08 forecast) for every 1% decline in the USD exchange rate. We think the current share price fully discounts longer-term challenges (competition from Air Asia X, difficult second-round reform gains) and global macro threats (fuel prices, economic slowdown, one-off event risks).



Double-bagger

Share price has collapsed to a level which ignores MAS’ current cash hoard (RM2.63/ share) and annual FCF (RM0.60/Sshare). While longer-term challenges remain, we think MAS is an easy gainer over a 1-yr holding period.