MAS: This phoenix will not rise from the ashes unless...

I have received inquiries from time to time on many stocks. One name that comes up often is MAS. The question raised is whether this is a good time to buy MAS. My short answer has always been the same: There is never a good time to buy MAS.

Before I tell you why, let me tell you a short story. When I was working in Lee Wah Bank (now, merged into the UOB) in 1990, I knew of a customer who had 500,000 MAS shares. MAS was then trading at around RM10. This customer, who was a businessman of substantial means, pledged the block of MAS shares to the bank for a credit line. To give you a sense of the value of that block of MAS shares of RM5,000,000, you need to know that one bungalow in Pantai Hill in 1990 was worth about RM500,000. Today, a similar bungalow in Pantai Hill is worth at least RM5,000,000 each. Thus, 10 bungalows in Pantai Hills wirth RM5,000,000 in 1990s would be worth RM50 million today.

However, if the said customer has held onto his MAS shares and subscribed for the 3 Rights Issues carried out in 2003, 2007 & 2010, his investment in MAS would be worth only RM1.6 million! That's after spending RM3.1 million to subscribe for the 3 Rights Issue and holding onto his initial investment worth RM5.0 million in 1990s.


Table: MAS's investment performance since 1990


Chart 1: MAS's monthly chart as at July 25, 2014 (Source: Chartnexus)

In investing, we like to look out for recovery play. Who wouldn't want to get into Apple at USD4 in 1990s and to see the stock rallied to USD700 in 2012 (before it split 1-to-7 in June this year). Can MAS be an Apple?

I appended below 3 charts:
1. Profit & Loss chart shows that MAS is a company that has been threading on water even in good times.


Chart 2: MAS's topline & bottom-line for the past 13 years (Source: Equities Tracker & Nexttrade)

2. Cashflow chart shows that MAS can hardly generate positive operating cashflow. The only outstanding year was FY2007 when it generated an operating cashflow of RM2.37 billion. That can be explained by the followings:

• Profit of RM841 million (contributed by Residual Value sharing on sale of aircraft by Penerbangan M'sia Bhd of RM209 million & gain on sale of properties of RM105 million)
• Increase in Trade & Other Payables of RM477 million
• Increase in Sales in advance of Carriage of RM613 million

In another word, MAS's operation had continuously drained its resources. In a world of scarce resources, MAS is a luxury that we cannot afford. The 3 Rights Issues had cost investors a total of RM7.66 billion. How much more must we spend before MAS can get its house in order?


Chart 3: MAS's cashflow for the past 12 years (Source: Equities Tracker & Nexttrade)

3. From the Current Ratio & Gearing Ratio chart below, we can see that if MAS does not raise fund from time to time, its financial position would be untenable. It would not surprise me if MAS were to propose another Right Issue in 2015.


Chart 4: MAS's  Current & Gearing Ratios for the past 10 years (Source: Equities Tracker)


Diagram: MAS's entitlements over the years

The question that must be asked - and, I am sure it had been asked many times in the past 6-7 years -is how to make MAS a viable airline? Well, what have we not tried? We've tried privatization! We've tried asset-light model! We've tried to ramp up load factor by lowering prices!It all failed.

For the sake of Malaysian taxpayers, let's stop kicking the can down the alley and let's bite the bullet. Let's try "bankruptcy" (or, whatever legal form that's available in Malaysia) and then a true restructuring where every stakeholder will share the losses or pain equitably. If we try this, MAS may rise again one day, like the proverbial Phoenix from the ashes.

Meanwhile, investors should avoid this stock. If there is no true restructuring, MAS will continue to bleed. If there is courage to undertake a true restructuring, you will have to take your losses immediately. This is a no-win situation!

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My take on MAS as an investment does not detract from my personal feeling regarding the senseless loss of 295 innocent lives in the tragic incidence that brought down flight MH17. The world must bring the perpetrators of this cruel criminal act to justice.



Note:
In addition to the disclaimer in the preamble to my blog, I hereby confirm that I do not have any relevant interest in, or any interest in the acquisition or disposal of, MAS.