MAS eyes RM6b capital expenditure

Carrier to take delivery of 23 planes this year

PETALING JAYA: Malaysia Airlines (MAS) is staring at a capital expenditure (capex) of RM6bil this year and RM3.5bil for 2013 because of the aircraft deliveries that have been lined up for this year and next.

This year alone it is going to take delivery of 23 aircraft five 555-seater A380 which it will deploy for the Kangaroo route (Sydney-KL-London-KL-Sydney); 13 B737-800s and five A330-300s. MAS plans to deploy its first A380 by July this year.

Most of these aircraft were ordered during the time of Tengku Datuk Azmil Zahruddin (previous managing director of MAS) as he had the foresight that the next generation aircraft would be more fuel-efficient. These new birds will reduce the fuel bill by at least 10%.

The average fleet age of the aircraft that MAS is using for its operations currently is 12.2 years but, with these new additions, the average fleet age will fall to 7.7 years, making it an airline with one of the most modern fleets in the region.

On Wednesday, MAS' new management told analysts that it would spend RM6bil in capex for this year for 23 aircraft deliveries and was looking at several options to fund the capex.

It now has RM1.1bil in its coffers, which is less than the RM2.2bil it had a year ago, and the current cash levels are insufficient for the capex it has planned out for the year.

“We think MAS will try to do sale and leasebacks (SLB) as the market demand is still good. But SLB is highly reliant on the liquidity level in the European and US financial institutions. The second option is of course for MAS to make balance sheet purchase, but we understand the current target capital ratio for aircraft financing is 30:70 (equity:debt),” an analyst with Maybank Investment Bank said in his report.

“MAS only has RM1.1bil in cash, which is only sufficient to cover 50% of its 2012 needs. Management gives the impression that it will resist raising new equity and spur liquidity via other means but we rate the probability of an equity raising happening at 70%.''

The new MAS team is giving itself 60 days to come up with a plan to strengthen its balance sheet so that it can get the funding it needs for the planes.

Analysts are looking at its gearing level surpassing the current 4.4x as MAS seeks more funding for its capex.

After reporting a RM2.5bil net loss for the full year ending Dec 31, 2011 on Wednesday which grabbed headlines globally, analysts are worried that the first and second quarters of 2012 will also be tough for the airline given the rise in jet fuel prices.

Jet fuel is already hovering around US$135 a barrel and AmResearch in its note said “our current projections already assume jet fuel to average at circa US$130/barrel. And every US$1 increase will reduce earnings by 9%.''

MAS had a disappointing fourth quarter in 2011 where its net loss was RM231mil as opposed to a net profit of RM60mil a year earlier.

“The core operating results were poor for the the fourth quarter and while yields rose 9% year-on-year, the main drag came from a sharp drop in the load factor to 72.5%, reflecting MAS' weak pricing power,'' said AmResearch.

It is no surprise that after the disappointing results there were no “buy” calls on the stock. Of the 18 houses, only five had “hold” calls and 13 calling a “sell” on the stock according to data compiled by Bloomberg. Yesterday MAS shares shed 5 sen to close at RM1.38.

AmResearch told investors in its note to opt for AirAsia instead of MAS while Kenanga Research said it was “cautious on MAS' future financial performance'' at this juncture as it saw more downside in MAS bottomline in the near term. They have a target price of RM1.05 a share while analysts consensus compiled by Bloomberg believe the target price is RM1.20 a share.

“We think MAS will barely break even in 2012 and we lower our core net profit forecast to RM5mil from RM78mil,'' Kenanga added.