MAS - Additional B737-800s (HLIB)

Share price: RM1.42

Price Target: RM1.27

News:

 MAS announced that it has exercised an option to purchase 10 additional units of Next-Generation B737-800s, which is valued at more than US$800m (based on current list prices).

 MAS still has remaining options to purchase 10 additional units of B737-800s from its initial 2008 contract.

 Additionally, MAS has signed an exclusive 5-year agreement for Pratt & Whitney’s environmentally friendly EcoPower® engine wash service which will reduce fuel burn by as much as 1.2%.

Financial impact:

 Minimal in the short term from P&W engine wash service while we expect the new aircraft to be delivered by 2015.

Pros / Cons:

 The exercise will increase MAS’s total delivery of B737-800 to 45 units, further improving its overall cost-efficiency.

 The additional B737-800 bodes well with MAS’s strategy in joining Oneworld Alliance, as the narrow-body aircrafts (suitable for short routes and regional routes) enhance the connectivity of MAS in South East Asia region.

 Furthermore, the additional capacity is timely with the expected increase in passenger demand as Oneworld Alliance members leverage on MAS strong regional network distribution, improving its load factor and yields.

 However, we expect the additional aircrafts will only be delivered starting 2015 after the full delivery of its existing

orders.

Risks:

 World crisis (ie. war, tourism and epidemic outbreak), prolong surge in jet fuel price and the development of high speed train between Singapore and Pulau Pinang.

Forecasts:

 Unchanged

Rating: Sell

 Positives –

 Leveraging on Oneworld Alliance network to improve services and connectivity.

 Beneficiary of strong air traffic into Malaysia, inline with government initiatives to boost tourism sectors.

 Reduced unit operating cost with delivery of new aircrafts.

 Negatives –

 Restructuring plan (BTP) subject to implementation risk.

 Competitive pressure on airfare from LCCs and FSCs.

 Surging jet fuel prices.

Valuation:

 Maintained target price at RM1.27 based on P/B of 1.4x.