A GENTLE HINT TO G!

Malaysian Air Recovery Offers Bet on Government Exit: Real M&A

By Angus Whitley & Chong Pooi Koon - Sep 9, 2013 6:00 AM GMT+0800
http://www.bloomberg.com/news/2013-09-08/malaysian-air-recovery-offers-bet-on-government-exit-real-m-a.html

“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.” 

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

Malaysian Air fell to an all-time low this year amid competition from budget airline AirAsia Bhd. (AIRA) 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 $1.6 billion airline, said Malayan Banking Bhd.

“Selling parts of the company is definitely viable,” said Ang Kok Heng, who helps manage $428 million of assets, including Malaysian Air shares, as chief investment officer at Phillip Capital Management Sdn. in Kuala Lumpur. “They must show some results before people are confident to buy. ”Among those calling for a sale are former Premier Mahathir Mohamad, who oversaw Malaysian Air’s initial public offering 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. said potential acquirers include local billionaire Syed Mokhtar Al-Bukhary, who last year persuaded officials to sell him the national carmaker.

Stay Out

Former Malaysian Air Managing Director Idris Jala, who is now a minister in the office of current Premier Najib Razak, last month said the government should stay out of the airline business, sending the stock up 7.9 percent the next day. Idris returned the company to profit on a quarterly basis in 2006.

The state’s 69 percent stake in the carrier is held by investment division Khazanah Nasional Bhd.

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

Malaysian Air is forecast to generate net income of 88 million ringgit ($26 million) next year fromsales of 15.6 billion ringgit, 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 3.4 billion ringgit, 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.”

Filling Seats

The shares fetched just 32 sen last week in Kuala Lumpur, down from 2.107 ringgit in June 2007 when Idris was in charge. Malaysian Air 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 won’t 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 Malaysian Air share, according to Mohshin, almost double last week’s price. Malaysian Air investors bought more shares for 23 sen each in May in a rights issue to raise 3.07 billion ringgit, data compiled by Bloomberg show.

Suggested Buyer

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 percent stake in carmaker Proton Holdings Bhd. for 1.29 billion ringgit. A year earlier, DRB purchased the state investment fund’s 32 percent stake in the national postal company.

A representative for Malaysian Air declined to comment on the possibility of a sale. Khazanah and DRB both said in e-mailed statements that they don’t 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.”

Spinoff Options

There aren’t any government-owned national airlines in the U.S. 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.

Malaysian Air’s engineering and maintenance business could fetch a valuation as high as 1.98 billion ringgit, and the airport terminal services unit could be valued at 1.07 billion ringgit, according to Mohshin’s estimates. The airline’s low-cost rural service Firefly could be worth as much as 1.78 billion ringgit 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 4.8 billion ringgit, based on Maybank’s estimates, equivalent to most of the airline’s total market value now of 5.3 billion ringgit. The remaining pieces are the unprofitable main airline and the cargo unit.

Adding Value

“You can add a lot of value,” Sharifah Farah, an analyst at Affin Securities Sdn. 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. (SIA) in 2000 sold stakes in SIA Engineering Co. (SIE) and Singapore Airport Terminal Services Ltd. (SATS), known as SATS, in initial public offerings. They now have a combined market value of $6.7 billion.

Previous efforts to scale back state control of Malaysian Air failed. The government agreed to bail out the unprofitable airline in 2000 by buying back a 29 percent stake from businessman 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 percent of Malaysian Air to the parent of AirAsia, the budget carrier run by Tony Fernandes. The about-face followed complaints by Malaysian Air’s biggest union.

Less Interference

Malaysian Air employees are less productive than their counterparts at neighboring airlines, according to data compiled by Bloomberg. They each generate an average of $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 (GIAA) 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.”