MAS recovery offers bet on government exit

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THE Malaysian Airline System Bhd (MAS) is offering a bargain investment for traders willing to bet on a sale, as a turnaround stokes calls for the government to exit its stake.

MAS fell to an all-time low this year amid competition from budget airline AirAsia Bhd (AirAsia). Now the company is projected to post its first profit in four years in 2014 on record revenue, according to analysts’ estimates compiled by Bloomberg. With the carrier on the mend, the government may seek to shed its majority ownership by selling or breaking up the US$1.6 billion airline, said Malayan Banking Bhd (Maybank).

Among those calling for a sale are former Prime Minister Tun Dr Mahathir Mohamad, who oversaw MAS’ initial public offering (IPO) in 1985, and the executive – now a minister – who previously returned the carrier to profit in 2006.

While the government may wait for the airline’s shares to recover before seeking buyers, RHB Research Institute Sdn Bhd (RHB Research) said potential acquirers include local billionaire Tan Sri Syed Mokhtar Albukhary, who last year persuaded officials to sell him the national carmaker.

“Selling parts of the company is definitely viable,” said Ang Kok Heng, who helps manage US$428 million of assets, including MAS shares, as chief investment officer at Phillip Capital Management Sdn in Kuala Lumpur.

“They must show some results before people are confident to buy.”

Former MAS managing director Datuk Seri Idris Jala, who is now a minister in the office of current Prime Minister Datuk Seri Najib Tun Razak, last month said the government should stay out of the airline business, sending the stock up 7.9 per cent the next day. Idris returned the company to profit on a quarterly basis in 2006.

The state’s 69 per cent stake in the carrier is held by investment division Khazanah Nasional Bhd (Khazanah).

Mahathir, Malaysia’s longest-serving leader, backed the idea of a sale, telling a state news service agency that a private owner would work harder to avoid losses than the government. Several groups have submitted takeover offers, a local newspaper said August 14.

MAS is forecast to generate net income of RM88 million (US$26 million) next year from sales of RM15.6 billion, according to analysts’ forecasts compiled by Bloomberg. After an estimated loss this year, a profit in 2014 would end a three-year, cumulative loss of RM3.4 billion, the data show.

“It will make more sense for Khazanah to sell at that time,” once the company, whose stock ticker is MAS, has restored profitability, said Jerry Lee, an analyst at RHB Research in Kuala Lumpur. “By that time, the share price has rallied. MAS are doing the right thing with their turnaround.”

The shares fetched just 32 sen last week in Kuala Lumpur, down from RM2.107 in June 2007 when Idris was in charge. MAS is trading at just 0.19 times sales, near its low of 0.15 in June, data compiled by Bloomberg show.

The plan to stem losses hinges on retiring older, less economical aircraft and leaving fewer seats empty on flights to Asia’s major tourist destinations.

Najib, the Malaysian premier, said last month the government will not sell its stake and the airline’s turnaround ‘cannot happen overnight’.

The government “needs to see tangible and credible improvement and the share price to reflect that,” said Mohshin Aziz, a Kuala Lumpur-based analyst at Maybank. “Only then will they start to sell it off.”

Khazanah probably wants at least 60 sen for each MAS share, according to Mohshin, almost double last week’s price. MAS investors bought more shares for 23 sen each in May in a rights issue to raise RM3.07 billion, data compiled by Bloomberg show.

DRB-Hicom Bhd (DRB), the Malaysian conglomerate and auto dealer controlled by Syed Mokhtar, has bought at least two other stakes from Khazanah in the past two years. Based in Shah Alam, outside the capital, DRB in 2012 bought Khazanah’s 43 per cent stake in carmaker Proton Holdings Bhd for RM1.29 billion. A year earlier, DRB purchased the state investment fund’s 32 per cent stake in the national postal company.

A representative for MAS declined to comment on the possibility of a sale. Khazanah and DRB both said in e-mailed statements that they did not comment on speculation.

“If there was a genuine attempt by a Syed Mokhtar Bukhary company to buy MAS, the resistance wouldn’t be as bad,” said Maybank’s Mohshin. “The notion of a national airline is an outdated one. There’s no need for it anymore.”

There are no government-owned national airlines in the US and such entities are becoming more rare in Europe, according to Mohshin. That trend will spread to Asia, he said. Even without an outright sale, the government could raise billions of ringgit listing some of the airline’s units that do make money, he said.

MAS’ engineering and maintenance business could fetch a valuation as high as RM1.98 billion, and the airport terminal services unit could be valued at RM1.07 billion, according to Mohshin’s estimates. The airline’s low-cost rural service Firefly could be worth as much as RM1.78 billion on the stock market, he said.

“I would be open or even excited if they were to venture down this sort of route,” Mohshin said.

All told, those profitable units have a combined value as high as RM4.8 billion, based on Maybank’s estimates, equivalent to most of the airline’s total market value now of RM5.3 billion. The remaining pieces are the unprofitable main airline and the cargo unit.

“You can add a lot of value,” Sharifah Farah, an analyst at Affin Securities Sdn Bhd (Affin Securities) in Kuala Lumpur, said in a phone interview. “At least the profit-making side would not be pulled down by the main operation.”

Singapore Airlines Ltd in 2000 sold stakes in SIA Engineering Co and Singapore Airport Terminal Services Ltd, known as SATS, in IPOs. They now have a combined market value of US$6.7 billion.

Previous efforts to scale back state control of MAS failed. The government agreed to bail out the unprofitable airline in 2000 by buying back a 29 per cent stake from businessman Tan Sri Tajudin Ramli for more than double the airline’s stock price at the time.

In May 2012, Khazanah reversed a share swap that had handed 21 per cent of MAS to the parent of AirAsia, the budget carrier run by Tan Sri Tony Fernandes. The about-face followed complaints by MAS’ biggest union.

MAS employees are less productive than their counterparts at neighbouring airlines, according to data compiled by Bloomberg. They each generate an average of US$222,000 in revenue, less than half the figure at Singapore Airlines, the data show. Workers at Thai Airways International Pcl and PT Garuda Indonesia Persero each bring in more revenue.

That may not put off buyers who see an opportunity to increase efficiencies.

“Can MAS be revamped and made more competitive, even profitable?” said Shukor Yusof, a Singapore-based aviation analyst at Standard & Poor’s. “Absolutely, provided the right people with the right motives and mindset run the carrier and with little government interference.” — Bloomberg