Malaysian Airline System 3QFY08 : Below expectations

• Below expectations.
9MFY08 results were below house and market expectations. Annualised core net profit was 56.2% and 49.9% below house and consensus estimates respectively. As expected, no dividends were proposed for the quarter.
• 9MFY08 revenue +6.2%, core net profit -60.2%.
Revenue was 6.2% higher y-o-y despite 4% capacity reduction and load factor declining by 3.0 pts as revenue per ASK improved by 8% following fuel surcharge hike. However, this was not sufficient to offset higher fuel cost which has increased 47% y-o-y, not even after the company
managed to slash non-fuel expenditure by 10%. MAS has achieved cost savings of RM900m YTD and is on track to meet its RM1bn target. This resulted in core net profit to slump 60.2% y-o-y after taking out exceptional items which mainly comprise of RM102m gain arising from the
change in accounting estimates of unavailed credits on sales in advance of carriage.
• Jet fuel price retracing from peak but demand destruction sets in.
Although jet fuel price has retraced from its peak US$182/bbl in July to US$68/bbl on 24 November, demand destruction amid global economic downturn may offset the “savings” from fuel cost. Furthermore, savings may be limited as MAS has hedged 53% of its fuel requirement for
FY2009 at US$83/bbl on crude oil basis or about US$103/bbl on jet fuel basis. The exact impact of MAS hedge position on FY2009 fuel cost is far from certain as management has indicated that certain derivative instruments used to hedge its fuel requirement have option elements.
• Uncertainty over dividends for FY2008.
When asked on dividends for FY2008, management was again noncommittal and stressed that dividends will depend on the full-year results for FY2008.
• Valuation and recommendation.
We are putting our call on MAS on HOLD pending further review of our estimates and target price.