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CYBERJAYA CAMPUS

FACULTY OF MANAGEMENT

MBA CENTRE

COURSE :CORPORATE FINANCE

Analysis of financial performance of :


YTL International Power co., AIRASIA Airline,
And Malaysia Airline
Trends: cost of capital and dividend policy

Students:
SAM AMIREBRAHIMI
KOUROSH SHARIFIRAD
REZA MAH
EHSAN AMINAIE

OCTOBER 2009

1.Introduction
To a person who does not have little – or any – experience in financial reports by companies or
other relevant financial institutions, such documents may look very strange, confusing and full of
numbers and technical terms. This may lead such person to become bewildered about
understanding the direction of the company as well as assessing its performance which will
further leads to harder and more complex decision making process in case of investment, or even
working for the company as an employee.
Financial reports are normally formal documents which reflect the financial activities of a
business, person or any other entity, using financial language; it provides an overview of such
entity’s financial condition in both short and long term. Four major and important financial
documents are considered as Balance Sheet, Income Statement, Statement of retained Earnings,
and Statement of Cash Flows. In general, while balance sheet provides information regarding
assets, liabilities, and owners’ equity, the income statement provide information about income,
expenses and profit of the company over a particular period of time. Statement of retained
earnings reflects the information regarding the changes in retained earnings of a particular entity.
And last one but not least, which is one of the most important among mentioned documents is
cash flow statement which reports about the cash inflow and outflow of firm’s operational,
financial and investing activities.
In this work, three selected companies – two of major Malaysian airborne companies and a
conglomerate one – and their last five years’ financial reports have been analyzed in detail from
several dimensions – explained shortly – in order to assess their strengths, weaknesses, and
overall performance. As the conclusion, their overall performance is compared with each other
and necessary points for improving their level of performance are recommended. The reason
behind this selection is that two of these companies are important players in the Malaysian
airborne industry, their existence in the same industry results in a fair comparison among them
and a useful report for airborne industry in Malaysia. Selection of the third company – YTL – is
because of its importance to Malaysia as one of the most successful global businesses in the
world. These companies are Air Asia, Malaysian Airlines, and YTL Corporation.
1. AirAsia which is the pioneer in low-cost airline business in the world, with more than 65
domestic and international destinations. It was established in 1993 and its growth in case of
revenue at the end of 2008 was over 32% and passed 830,000 Malaysian Ringgit.
2. Malaysian Airlines is the government-owned airline which started in 1987 after a name
change; and despite the financial reconstruction in the recent years, still has a strong presence
in Asia-Pacific area.
3. YTL Power International Berhad is the global utilities arm of YTL Corporation (as a
parent CO). The company was established in Oct 96 to house the group’s power-related
investments. In May 97, it made history as the first company to be listed under the infrastructure
project company (IPC) category on the Main Board of Bursa Malaysia.
This work’s major focus is on two of the important elements in firm’s financial activities –
Dividend Policy and Cost of Capital – and analyzes such elements from these two perspectives
in order to provide a comparison among mentioned companies.
In general, dividend is referred to the distribution of earnings among shareholders and as will be
discussed in details in Literature review chapter, a company’s “Dividend Policy” determines
what happens to the value of the firm as dividend is increased, holding everything else (capital
budgets, borrowings) constant. Thus, it is a trade-off between retained earnings on one hand, and
distributing cash or securities on the other. Dividend can be given to shareholders in form of
cash, Stock or stock repurchased.
Cost of Capital as defined by Washington State University1, refers to the cost of funds that a
company raises and uses, and the return that investors expect to be paid for putting funds into the
company. It is therefore the minimum return that a company should make on its own
investments, to earn the cash flow out of which investors can be paid their return. For the
shareholders, cost of capital is the dividend they expect to get in addition to the capital they gain
on the value of their shares. Cost of capital and methods for its calculations are discussed later in
the next chapter.

2. Literature Review
In this section, in order to have more information about the related methods regarding two points
of view – Dividend policy and Cost of capital – which selected companies are going to be
analyzed based on them, various works and theories regarding them are reviewed.

2.1. Dividend Policy


As introduced, dividend is the distribution of company’s profits or surplus among shareholder
members. This surplus may be paid out as dividends or reinvested in the business called retained
earnings. The firm distributes its profits in order to benefit the shareholders in case of their

1
http://cbdd.wsu.edu/kewlcontent/cdoutput/TOM505/page41.htm
financials. Hence, it is one of the important strategies that companies undertake. On the other
hand, shareholders usually do not rely on such dividends because their major benefits from
shares and stocks come from stock exchange and buying and selling shares which they earn – or
in the bad case, lose – considerably.
A company’s dividend policy refers to the changes in value of the firm – and consequently the
price of its stock and shares – when dividend increases or conversely decreases. Thus, it is a
trade of between the retained earnings on one hand and the distribution of cash or other types of
securities on other.
In general, as Alex Tajirian2 explains in his book, dividend can be given to shareholders in four
forms. These types of dividend are as follows:

• Cash dividend – company distributes dividend to shareholders in form of cash. As an


example, shareholders receive $0.50 for each of their shares.
• Stock dividend – instead of having a cash outflow, company distributes the dividend
in form of stock. For example, company gives one new stock to the respective
shareholder for each ten shares he/she holds.

• Stock Repurchase – to overcome the problem of leaving the cash in the regular form
of dividend, company use a strategy to purchase the sold shares from shareholders.
• Property dividends3 – in this form of dividend which is very rare, shareholders
receive assets in the issuing company or other relevant subsidiaries.
There are some critics regarding dividend payouts. Many financial researchers as well as
managers and board members are in this belief that if the company retains the surplus and profits
and reinvest them in the company and projects with positive net present value, it will result more
benefits for the company rather than paying out as dividends.
An important ration regarding dividends is Pay-out Ratio4 which give information about the
amount of dividend has paid out by the company and the amount saved in order to increase the
internal growth. Dividend payout ratio is calculated as:

In general, companies and individuals look for stocks and shares issued by companies with
dividend payout ration between 40 to 60 percentages. This shows that good portion of the profit
of the company is used to be paid out as dividend and a good portion is also used for
reinvestment in the firm and increases the rate of internal growth. It is possible for companies to
have dividend payout ration greater than 100% but it is difficult to sustain and hinders the growth
of the company.
2
http://www.morevalue.com/i-reader/ftp/files.html
3
http://en.wikipedia.org/wiki/Dividend#Forms_of_payment
4
http://dividendmoney.com/the-dividend-payout-ratio-explained/
Some of the theories regarding the corporate dividend policy are discussed in the following
section. These theories are divided into two general categories – Full information models (tax-
factor) and models of information asymmetry.
1. Full information models
The discussion started with the Miller-Modigliani Proposition (19615) and later research
(Modigliani -1982) finds the clientele effect is responsible for only nominal alteration in
portfolio composition rather than the major differences predicted by Miller (1977).6
Masulis and Trueman (1988)7’s model predicts that investors with differing tax liabilities
will not be uniform in their ideal firm investment/dividend policy. They discuss that as
liability on dividend increases, dividend payment decreases and earning investment would
increase. Conversely if the liability on dividend decreases, dividend payment increases and
earning investment decreases.
Farrar and Selwyn (1967)8 work implies that investors tend to maximize after-tax income.
This model suggests no dividend to be paid out rather stock repurchase should be used. This
model was extended by Brennan (1970)9 later. In another work, Miller suggests a strategy if
tax-sheltering of income by high-tax-bracket individuals.

2. Models of Information Asymmetry


These models can be further divided into signaling models, Agency cost models, Free cash-
flow models, and Behavioral models.
a) Signaling Models - The path of signaling models was all started from the work
by Akerlof (1970)10 which used the car market and then generalized later by Spence
(197311, 197412) and became a prototype of financial modeling of signaling.

5
Miller, Merton H. and Franco Modigliani 1961, Dividend Policy, Growth, and the
valuation of shares, the Journal of Business, 34, 411-433.
6
Miller, Merton H. , 1977, Debt and Taxes, the Journal of Finance, 32, 261-275.
7
Masulis, Ronald W. and Brett Trueman, 1988, Corporate Investment and Dividend
Decisions Under Differential Personal Taxation, Journal of Financial and Quantitative
Analysis, 23, 369,386
8
Farrar, Donald E. and Lee L. Selwyn, 1967, Taxes, Corporate Financial Policy and
Return to investors, National Tax Journal, 20, 444-462.
9
Brennan, Michael J., 1970, Taxes, Market Valuation, and Corporation Financial Policy,
National Tax Journal, 23, 417-427.
10
Akerlof, George, 1970, the market for “Lemons”: Quality Uncertainty and the market
mechanism, the quarterly Journal of economics, 84, 488-500.
11
Spence, Michael, 1973, Job Market Signaling, The quarterly Journal of Economics, 87,
355-374
12
Spence, Michael, 1974, Competitive and Optimal Responses to Signals: An analysis of
efficiency and distribution, Journal of Economic theory, 7, 296-332.
Many other researchers have worked on signaling that because of our limitation in this
work, we refuse to explain. Examples of such works are Bhattacharya (1979,1980),
Talmor (1981), Hakansson (1982), John and Williams (1985), Miller and Rock (1985),
Bar-Yosef amd Juffman (1986) and so fourth.
b) Agency Cost Models - The famous works in this field are Adam Smith (1937)13,
Scott (1912), Carlos (1992), Jensen & Meckling (1976), Fama & Jensen (1983a 14,
1983b15) which introduced the use of covenants to tackle the potential shareholders-
bondholders conflict.
c) Free Cash-flow Hypothesis – Jensen (1986)16 combined te agency theory and
Market information asymmetry.
d) Behavioral Models – Schiller (1984)17’s model implies that investor behavior is
influenced by societal nouns and attitudes. Based on the personal style of living and
decision making, different investors act differently in the same situations. Schiller’s work
explains this phenomenon. Michael 18(1979)’s work implies that the managers – like
investors – are influenced by other managers in other firms in making decisions in case of
dividend payouts. Other works in this field that worth mentioning here are Ho and
Robinson (1992)19 and Frankfurter and Lane (1992)20.
As the summary and conclusion of this section, this can be said that policy of dividend payout is
still a puzzle for managers and stakeholders. Managers decrease dividend only when necessary in
the event of the poor earnings with insufficient reserve to find the dividend. (Myers – 198421)

2.2 Cost of Capital


Cost of capital is referred to cost of obtaining funds for, or conversely, the return necessary to
ensure a positive net present value to a capital budgeting project. 22 In general, Capital is used for
13
Smith, Adam, 1937, the wealth of Nations, New York: Random house, Inc.
14
Fama, Eugene F. and Michael C. Jensen, 1983a, Separation of Ownership and Control,
Journal of Law and Economics, 26, 301-325.
15
Fama, Eugene F. and Michael C. Jensen, 1983b, Separation of Ownership and Control,
Journal of Law and Economics, 26, 301-325.
16
Jensen, Michael C., 1986, Agency Cost of Free Cash flow, Corporate Finance, and
Takeovers, The American Economic Review, 76, 323-329.
17
Schiller, Robert J., 1984, Stock Prices and Social Dynamics, Brokkings Papers on
Economic Activity, 457-510.
18
Michel, Allen J., 1979, Industry Influence on Dividend Policy, Financial Management, 8,
Fall, 22-26.
19
Ho, Kwok and Chris Robinson, 1992, Dividend Policy is relevant in perfect Markets,
Unpublished working paper.
20
Frankfurter, George M. and William R. Lane, 1992, The Rationality of Dividends,
International Review of Financial Analysis, 1, 115-129.
21
Myers, Stewart C., 1984, The capital Structure Puzzle, The Journal of Finance, 39, 575-
592.
22
http://en.wikipedia.org/wiki/Cost_of_capital#cite_note-0
funding the business which returns for those who financed the business by their money. Hence,
they expect their return on capital to be greater than cost of capital. The cost of capital is an
opportunity cost of finance, because it is the minimum return which an investor requires.
Managers use this measure in order to estimate the long-term capital budgeting projects, mergers
and acquisitions analysis and etc. For shareholders it is the dividend they expect to receive plus a
capital gain on the value of their shares, while for loan holders it is the rate of interest which is
quoted on the loan. Failure to pay such required return will result in the providers of finance
transferring their holdings to other opportunities with a better rate of return. Cost of capital
includes Cost of Debt and Cost of Equity.

• Cost of debt
A company uses different forms of debt (such as bonds and loans), hence these debts
must be paid back in a particular rate of return. Cost of debt is a measure which helps to
give an idea to the investors about the rate of return and riskiness of the company.
Therefore for comparing different companies, investors can use this measure – cost of
debt – to identify riskier investments in companies. Normally, risky companies have
higher cost of debt.23
Since the Cost of capital is the payout rate of the debts, it can be calculated based on
before-tax and after-tax. To calculate the after tax rate of cost of capital, we simply
multiply the before-tax rate by one minus marginal tax:

• Cost of equity
In finance, the cost of equity refers to the minimum rate of return a firm must offer the
shareholders to compensate them for standing the risk of investment as well as the delay
in their returns.24
The cost of equity is generally the rate of return on an investment that is required by
ordinary shareholders. This return includes both dividend and capital gains. Therefore the
cost of equity is the cost of capital which equate the current market price of the share
with the discounted value of all future dividends in perpetuity. In other words, it reflects
the opportunity cost of investment for individual shareholders and is calculated as
follows:

23
http://www.answers.com/topic/cost-of-debt-1
24
http://en.wikipedia.org/wiki/Cost_of_equity
There are some other methods that the cost of equity can be calculated by. An example of
such methods is CAPM (Capital Assessment Pricing Model). Which is used to
theoretically determination of required rate of return on an asset.

Another way of calculating the cost of equity is to take the Risk free return (return of the
government bond) and adding to that the company’s Beta (as published frequently by
certain investment services companies) times the difference of an Average stock return
minus the Risk-free return:

In above equation, risk free return refers to interest rate that would be returned on an
investment which was completely free of risk. Beta is a figure regarding a stock or
portfolio which describes the relation of its returns with the financial market as a whole.
(for more information about Beta, visit http://richard-wilson.blogspot.com/2005/10/beta-
finance-beta-formula-and.html ).
stock returns are usually calculated for holding periods – month, quarter or a year.

Another way of calculating the cost of equity can be resulted by the reformation of above
equation into:

In this formula, risk free premium is the minimum difference a person or an investor is
willing to take an uncertain bet, between the expected value and the certain value that
he/she is indifferent to.25 In other words, risk premium is the expected rate of return
above the risk free interest rate.
Equity Beta in the above formula is a measure that reflects the systematic business risk
and financial risk of a company. And last but not least, the riskless rate is the rate of
return regarding a risk-free investment.

Now that the concepts and calculations of different dimensions that we want to analyze on our
three companies are defined and explained, we are going to have a brief introduction of those
companies as well as the analysis of their financial reports in the next chapter, followed by a
25
http://en.wikipedia.org/wiki/Risk_premium
comparison of the overall performance of each company and required recommendation to
improve their performance in the market.

3. YTL Power International Berhad.


YTL Corp is one of Bursa Malaysia's largest companies and together with its five listed
subsidiaries has a combined Market Capitalization of about RM30.65 billion (US 8.64 billion ).
The company has also been listed on the Tokyo Stock Exchange since 1996, being the first Asian
non-Japanese company to be listed there. Amongst the group's key businesses are utilities high
speed rail, cement, manufacturing construction , contracting , property development, hotels
&resorts and technology incubation and it serves more than 10 million customers in over three
continents.

3.1. Background
Utilities arm of YTL Group. YTL Power International (YTL Power) is the global utilities arm
of YTL Corporation (YTL MK, RM7.35, and Not Rated). The company was established in Oct
96 to house the group’s power-related investments. In May 97, it made history as the first
company to be listed under the infrastructure project company (IPC) category on the Main Board
of Bursa Malaysia.
Started off as a local power play. YTL Power’s roots can be traced back to 1993 when its
subsidiary, YTL Power Generation Sdn Bhd, became Malaysia’s first IPP following a
nationwide power blackout in 1992 and the government’s drive to privatize the electricity
industry. Back then, the group had two power generation plants under its belt.
Evolving into a global utilities group. Nevertheless, since 2000, YTL Power has been on an
aggressive acquisition trail, snapping up utility assets from near and afar. It has successfully
transformed itself from just a local power generator to a global utilities group. It currently owns
power assets in Malaysia (100% YTL Power Generation), Indonesia (35% in Jawa Power) and
Australia (33.5% stake in Electra net). It is also exposed to water concession assets in the UK
through its 100% stake in Wessex Water.
Wessex is the largest EBIT contributor. In FY07, Wessex Water accounted for 68% of group
EBIT including associates. The power division made up another 27% while investment holding
contributed the remaining 5% in the form of dividend and interest income. Over the years,
Wessex Water has become an increasingly dominant contributor, reinforcing the shift in the
group’s earnings profile from a pure local power base to a more diversified global utilities base.
Interestingly, YTL Power derived approximately 79% of its EBIT (including associates’
contribution) from overseas assets, a clear indication of its success overseas.
Spare capacity offers growth opportunity. YTL Power’s spare capacity will come in handy
when there is a power shortage in Peninsular Malaysia as TENAGA may require it to supply
additional electricity in such circumstances. In 2001, it entered into a supplemental agreement
with TENAGA for three years ending 31 Dec 03 to supply an additional 1,400GWh p.a. to
TENAGA at 10.9 sen per kwh. This boosted the plant’s capacity factor to 83% during the period.
However, this is unlikely to happen over the next few years as the country’s reserve margin is
expected to stay high at 35%.

3.2. YTL’s Financial Highlights


2008 2007 2006 2005 2004

Revenue (RM’000) 4,242,518 4,068,008 3,758,125 3,671,315 3,386,920

Profit Before Taxation 1,385,701 1,296,757 1,112,400 976,444 836,433


(RM’000)
Profit After Taxation 1,038,846 1,269,214 874,483 742,178 613,049
(RM’000)
Shareholders’ Funds 6,400,395 6,127,143 5,728,957 5,229,233 4,560,490
(RM’000)
Earnings per Share (Sen) 20.00 25.40 17.89 15.84 13.63
Dividend per Share (Sen) 12.50 17.50 10.00 10.00 10.00
Total Assets (RM’000) 27,826,876 24,002,89 22,244,265 21,905,572 20,576,574
0
Net Assets per Share (RM) 1.20 1.20 1.16 1.08 1.02
Resource: Financial annual report of YTL Power; 2008.

3.3. Cost of capital


The cost of capital as we defined before is the cost of obtaining funds for, or, conversely, the
required return necessary to meet its cost of financing a capital budgeting project. To find how
the cost of capital is for YTL, we give the following example:

“Giving advice: Suppose YTL considering, in the year 2007 , take a new project costing
MR60 million to yield its cost saving of MR15 million a year for five years. What is your
advice to YTL? What do we need To determine NPV of this project?”

To answer to above questions, taking the following steps is required:


1) Determining weight of debt and equity on the capital structure
2) Cost of equity: Market Risk Premium * Equity Beta + Riskless Rate
Weighted average of capital :(E/E+D).y (D/D+E).d(1-tc)
Computing NPV of the project: - mr60 + mr15/ (1+Rwacc)+…Mr15/(1+Rwacc) 5
COMPUTING:
Interest rate : 27%
Beta: 0.52
3.5%+0.52(10.84-3,5%)=7.32%
Total Assets: 24002.9 Total Equity=6033.1 Total liabilities: 17696.8
513 * 7.32% + .749 * [2(1-.27)]=2.93%
NPV: -MR60 + MR15 * A =
-MR60+68.805= MR8.805
The Firm should accept the project because NPV is positive.

Financial performance
FY07 results review. During FY07, the group reported a large 45% growth in net profit, driven
mainly by some RM185m deferred tax and higher investment income. EBIT contributions from
the local power segment fell 30% ,dragged down by some RM156m provisions for receivables.
Wessex Water, on the other hand, reported an encouraging 37% increase in profit contributions
as higher tariffs, along with cost control measures, widened profit margins.
Moderate earnings prospects. At the pre tax level, we expect YTL Power to record moderate
growth of 9-13% p.a. over the next three years, fuelled mainly by higher efficiency of its power
plants in Indonesia and above-average price hikes for Wessex Water. Although earnings from its
local power plant should return to normal after FY07’s one-off provisions, we still project a 15%
dip in FY08 net profit as the effective tax rate normalizes after FY07’s deferred tax savings.
Subsequently, FY09-10 net profit growth should mirror the growth at the pre-tax level.
Exchange rate risks. YTL Power derives around 79% of its EBIT (including associates’
contribution) from its overseas assets in Australia, the UK and Indonesia (Figure 22). This means
that its core earnings would be adversely affected by a firming of the ringgit against the sterling
pound, Australian dollar or the greenback. However, this would be partially offset by Forex
translation gains on its foreign denominated debt.
Looking into the group’s debt mix, a sizeable 66% is denominated in sterling, 19% is in ringgit
and the remaining 15% in US dollars. Our rough calculation shows that every 1% appreciation in
our assumption for the pound would have a 0.5% positive impact on YTL Power’s core net profit
due to higher translated earnings from Wessex Water. But reported net profit could be squeezed
by 6.0% due to the recognition of one-off translation losses resulting from the larger pound-
denominated debt.
In US dollars term, the core bottom-line positive impact from a 1% appreciation is somewhat
smaller at 0.1% owing to its relatively smaller contribution to group earnings. However, this
would be more than offset by the 1.5% negative impact resulting from the recognition of debt-
related translation losses at the reported net profit level.
3.4. Dividend policy
Potential share overhang. There may be a share subjected to the potential issuance of up to
1,284m new shares (24.2% of its current paid-up capital) via the exercise of outstanding warrants
and conversion of guaranteed exchangeable bonds (GEB) due in 2010. The exercise price for the
warrant is RM1.39 on an annual better view while the conversion price for the GEB is fixed at
RM2.28.Looking back historically, there appears to be a downward pressure on YTL Power’s
share price when a sizeable conversion takes place.
Another potential source of share overhang is its parent’s proposed restricted offer for sale
(ROS) exercise. In Aug 06, YTL Corp proposed a 1-for-10 ROS of YTL Power shares at
RM1.00 per share. Exactly a year later, the conglomerate again proposed a ROS exercise of 1-
for-15 YTL Power shares, also at RM1.00 per share. Assuming that the two largest shareholders
of YTL Corp, i.e. the YEOH family and EPF, do not sell the ROS shares, the potential share
overhang is only around 37m shares or 0.7% of YTL Power’s outstanding shares. Based on its
average daily volume of 2.7m, it would take around 14 days to clear the potential overhang.
Nevertheless, based on the experience from the first ROS, there appears to be minimal impact on
YTL Power’s share price during the share transfer period.

Share buybacks support share price. YTL Power has been actively buying back its shares over
the past few years. In general, it has bought back 646.8m shares (12% of its current paid-up
capital) at a cost of RM1,476.0m. These share buybacks provided considerable support to the
share price.
Can afford 1-for-28 treasury share distribution. Some of the shares that YTL Power bought
back have been distributed to its shareholders in the form of a dividend-in-specie in 2001, 2005
and 2006. Over the past five years, it has given shareholders a total of 433m shares. It has
190.1m treasury shares left, which suggests that it can afford a 1-for-28 share distribution. This is
equivalent to a payout of 9 sen per share or 4% based on the last closing price.
Attractive dividend yields. YTL Power has a formal 20% cash dividend policy where the group
has consistently paid out 10 sen gross DPS from FY02 to FY06. During FY07, the group
declared a higher 15 sen payout which translates into a 60% gross payout policy. In terms of
yields, the 6% offered is also attractive. Including the share dividends that were paid out in Feb
07, FY07’s dividend yield would be an attractive 10.4%.

3.5. YTL’s Strengths and Weaknesses


Although YTL is a very powerful and doing well in global markets,our work has identified some
of the reasons of its good performance as well as some of the weaknesses that might be
eliminated in order to help the company to perform better than before. The table below shows the
YTL’s Strengths and Weaknesses:

Strengths Weakness
Profitable( take or pay) PPA(power Exposed to FOREX risks: its core earnings
purchase agreement) contract: YTLPG signed would be adversely affected by a firming of the
a power purchase agreement (PPA) with TENAGA ringgit against the sterling pound, Australian dollar
on 31 Mar 1993 for a term of 21 years expiring on or the greenback.
30 Sep 2015. Under However, this would be partially offset by forex
the PPA, TENAGA is obliged to “take or pay” a translation gains on its foreign denominated debt.
minimum of 7,450Gwh of electricity per annum. assets interest rate risk: a lower interest rate
This represents a capacity factor of around 70%. environment may reduce its chances of acquiring
Fuel cost pass-through element in PPA: Gas new assets as the group will face more competition
supply to YTL Power’s power plants is secured via from private equity funds.
a 21-year gas supply agreement (GSA) with
PETRONAS which also expires on 30 Sept
2015(low risk).
Good overseas track record: YTL Power
derived approximately 79% of its EBIT (including
associates’ contribution) from overseas assets, a
clear indication of its success overseas.

Strong management
WESSEX water ranks no1 in United
Kingdom Office of Water Services ranking:
In FY07, Wessex Water accounted for 68% of
group EBIT including associates.

3.6. Recommendations
• leveraging its cash hoard to seize profitable M&A opportunities
Since its acquisition of Jawa Power back in 2004, YTL Power has been silent on the
M&A front despite sitting on a RM7bn cash hoard. Although the group has been scouting
around, we believe its conservative screening has weeded out many potential targets
which have become overpriced in the global M&A boom. Notwithstanding the lack of
M&A activities, the group has steadily proven its ability to extract value from its existing
assets.
• Bidding for Singapore’s power assets and Given YTL Power’s experience in foreign
field and efficiently run operations, Singapore’s merchant market should bode well for
the company. Although it is too early to gauge the return, assuming a conservative 10%
return versus YTL Power’s 6% cost of funds, the asset could rake in an additional return
of 4% to such an investment.
• Utilising its Wessex: In particular, existing water operators are expected to migrate to a
licensing regime within a 2-year timeframe following the enactment of the two new
Water Acts by Jan 08. This creates opportunities for YTL Power to form JVs with state
governments or bid for licences given its proven track record in nurturing Wessex Water
into the top ranking water and Sewerage Company.
• Liquidity crunch a blessing in disguise: The recent market turmoil has undeniably
sparked fears of an impending liquidity crunch. Although this could lead to a dent in
global economic growth, we believe this puts YTL Power in a better position to scoop up
deals given its strong cash position. With its international utility expertise and ready
funds, asset acquisitions should be earnings enhancing for the group.
• Opportunities in the local water industry and ; We also see opportunities for YTL Power
in the local water industry, following the industry-wide restructuring efforts undertaken
by the government in an effort to formulate a more holistic approach in the management
of water services.

4. AirAsia
4.1. Company Background
The use of financial statements and considering them plays an important role in the strategic and
operation and financial management of airlines, and loss/gain at the successful airlines in the
future. In this chapter of our work, we look at the AirAsia’s financial reports and statements and
will identifying that have this famous low-cost company been success since founded or not?!
AirAsia, analyzes the current financial environment, cost of capital and the policies which
AirAsia has obeyed to issuing divined.
In 2001, Dato’ Sri Tony Fernandes along with Dato’Pahamin Ab. Rajab (Former Chairman,
AirAsia), Dato’ Kamarudin bin Meranun (Deputy Group Chief Executive Officer, AirAsia) and
Dato’ Abdul Aziz bin Abu Bakar (Current Chairman, AirAsia) formed a partnership to set up
Tune Air Sdn Bhd and bought Air Asia for a token sum of RM1.00. With the help of Conor Mc
Carthy(Director, Air Asia; former Director of Tune Air Sdn Bhd and former Director of Group
Operations, Ryanair),AirAsia was remodeled into a low cost carrier and by January 2002, their
vision to make air travel more affordable for Malaysians took flight.

AirAsia is one of the award winning and largest low fare airlines in the Asia expanding rapidly
since 2001. With a fleet of 72 aircrafts, AirAsia flies to over 61 domestic and international
destinations with 108 routes, and operates over 400 flights daily from hubs located in Malaysia,
Thailand, and Indonesia. Today, AirAsia has flown over 55 million guests across the region and
continues to create more extensive route network through its associate companies. AirAsia
believes in the no-frills, hassle-free, low fare business concept and feels that keeping costs low
requires high efficiency in every part of the business. Through the corporate philosophy of “Now
Everyone Can Fly”, AirAsia has sparked a revolution in air travel with more and more people
around the region choosing AirAsia as their preferred choice of transport.

4.2. AirAsia’s Vision & Mission


Air Asia’s Vision is to be the largest low cost airline in Asia and serving the 3 billion people who
are currently underserved with poor connectivity and high fares.
On the other hand, AirAsia has developed its mission to be the best company to work for
whereby employees are treated as part of a big family, create a globally recognized ASEAN
brand, attain the lowest cost so that everyone can fl y with AirAsia, and last but not least, to
maintain the highest quality product, embracing technology to reduce cost and enhance service
level.

4.3. AirAsia’s Strengths and Weaknesses


Strengths Weaknesses
• Low cost operations(The Airbus • Service resource is limited by lower costs
A320 is known for its fuel efficiency,
high reliability and low operating costs. • Limited human resources could not handle
In December 2007, AirAsia became the irregular situation
largest Airbus A320 customer in the
world. Also LCCT….) • Government interference and regulation on
airport deals and passenger compensation
• Fewer management level, effective,
focused and aggressive management • Non-central location of secondary airports

• Simple proven business model that • Brand is vital for market position and
consistently delivers that lowest fares developing it is always a challenge

• Penetrate and stimulate to potential • Heavy reliance on outsourcing


markets
• New entrants to provide the price-sensitive
• Multi-skilled staffs means efficient services
and incentive workforce

• Single type fleet minimize


maintenance fee and easy for pilot
dispatch
4.4. AirAsia’s Cost of Capital

Share Issuance

During the financial year, the Company increased its issued and paid-up ordinary share capital
from RM237,154,058 to RM237,420,958 by way of issuance of 2,669,00 ordinary shares of
RM0.10 each pursuant to the exercise of the Employee Share Option Scheme (“ESOS”) at the
exercise price of RM1.08 per share. The premium arising from the exercise of ESOS of RM 2,
615,620 has been credited to the Share Premium account.

4.5. AirAsia’s Dividend Policy


AirAsia does not pay dividends nor do we foresee paying dividends in the near future. The
business is in the early stages of development and capital is required to be reinvested for the
future’s well being. We believe this will ultimately yield the most beneficial returns when
viewed on a long-term basis.
No dividend has been paid or declared by the Company since the end of the previous financial
period. The Directors do not recommend the payment of any dividend for the financial year
ended 31 December 2008.

Budget airline AirAsia Bhd said” it has successfully placed out 380 million new shares at
RM1.33 per share, raising gross proceeds of RM505.4 million”

STOCKCODE NAME REF. HIGH LOW LAST CHANGE VOLUME(‘00)


5099 AirAsia 1.380 1.390 1.370 1.370 -0.010 18442

Changes in substantial shareholder’s interest : October 3 2009

Circumstances by reason of which Sale of equity, Purchase of share


Change has occurred :
Nature of interest : Direct and Indirect
Direct(units): 302’246’900
Direct(%): 10.96
Indirect/deemed interest (units) : 21’278’300
Indirect/deemed interest (%) : 0.77
5. Malaysia Airlines
5.1. Company Background
Malaysia Airlines started its operation on 1987 after the airline changed its name
from Malaysian Airline System. It is founded in 1947 by Malayan Airways. Then, it transformed
to Malaysian Airways due to Malaysia gaining its independence. After that, it changes its name
once more to Malaysia-Singapore Airlines and thereafter ceased its operation. It was then
divided into Malaysia Airlines and Singapore Airlines. Malaysia Airlines is listed on the stock
exchange of Bursa Malaysia under the name Malaysian Airline System Berhad. The airline
suffered high losses over the years due to poor management and fuel price increases. As a result
of financial restructuring (Widespread Asset Unbundling) in 2002, Malaysia Berhad became its
parent company, incorporated in 2002, in exchange for assuming the airline's long-term
liabilities. Under the leadership of the new CEO appointed in December 2005, Malaysia Airlines
unveiled its Business Turnaround Plan (BTP) in February, 2006, which highlighted low yield, an
inefficient network and low productivity (overstaffing).
Following the Widespread Asset Unbundling (WAU) restructuring of Malaysia
Airlines, Malaysian Government investment arm and holding company, Khazanah Nasional's
subsidiary, Penerbangan Malaysia Berhad is the majority shareholder with a 52.0% stake. After
Penerbangan Malaysia Berhad, the second-largest shareholder is Khazanah Nasional, which
holds 17.33% of the shares. Minority shareholders include Employees Provident Fund Board
(10.72%), Amanah Raya Nominees (Tempatan) Sdn Bhd (5.69%), State Financial Secretary
Sarawak (2.71%), foreign shareholders (5.13%) and Warisan Harta Sabah (2.4%). It has 19,546
employees (as of March, 2007). Malaysia Government has been reporting that the government's
holding company, Khazanah Nasional is keen on selling shares of Malaysia Airlines to remain
globally competitive in an industry which is fast-consolidating.
Malaysia Airlines has diversified in to related industries and sectors, including aircraft ground
handling, aircraft leasing, aviation engineering, air catering, and tour operator operations. It has
also restructured itself by spinning-off operational units as fully-owned subsidiaries, to maintain
its core business as a passenger airline. Malaysia Airlines has over 20 subsidiaries, with 13 of
them fully owned by Malaysia Airlines.
5.2. Malaysia Airlines’ Financial Highlights
Malaysia Airlines experienced its worst loss in FY2005, with RM1.25 billion losses. Since then,
the Business Turnaround Plan was introduced to revive the airline, in the year 2006. At the end
of the airline's turnaround program, in financial year 2007, Malaysia Airlines gained RM851
million net profit: a swing of RM987 million compared to RM134 million in losses in FY2006,
marking the national carrier’s highest-ever profit in its 60-year history. The achievement was
recognised as the world’s best airline-turnaround story in 2007, with Malaysia Airlines being
awarded the Phoenix award by Penton Media's Air Transport World: the leading monthly
magazine covering the global airline industry.

Revenue Expenditure Profit/(Loss) Shareholders EPS after


Year ended/(Quarter
(RM (RM after Tax (RM Fund (RM tax
Ended)
'000) '000) '000) '000) (cents)

31 December 2002 8,864,385 8,872,391 ▲336,531 2,562,841 ▲38.7

31 December 2003 8,780,820 8,591,157 ▲461,143 3,023,984 ▼36.8

31 December 2004 11,364,309 11,046,764 ▼326,07 3,318,732 ▼26.0

31 December 2005 9,181,338 10,434,634 ▼(1,251,603) 2,009,857 ▼(100.20)

31 December 2006 13,489,549 13,841,607 ▼(133,737) 1,873,452 ▼(10.90)

31 December 2007 15,288,640 14,460,299 ▲852,743 3,934,893 ▲58.05

31 December 2008 15,503,714 15,259,027 ▼245,697 4,186,000 ▼14.62

30 June 2009 6,093,480 5,912,027 ▼181,453 432,421 ▼10.781


Malaysia Airlines financial highlights

5.3.Dividend policy
During the financial year, the Company paid a final tax exempt dividend of 2% amounting to
RM15,400,000 on 14 September, 1999 in respect of the financial year ended 31 March, 1999.
The directors recommend a final tax exempt dividend of 2% amounting to RM15,400,000 in
respect of the year ended 31 March, 2000.

5.4. Strengths and Weaknesses


SWOT ANALYSIS

LNC is a holding company which operates insurance and investment management

businesses through subsidiary companies. The company is focused at creating a

strong brand name but faces the threat of a continued low interest regime.

• Strengths
o Market leading positions. LNC is a leader in both individual and employer-
sponsored annuity markets. The company ranks 5th in assets and 11th in variable
annuity sales (as of 2003) in the US. Based on assets, it is the 44th largest US
corporation and the 8th largest US stockholder-owned company based on
revenues. LNC is among the 10 largest life insurers in the US and is a leading
provider of life insurance products designed specifically for the high net-worth
and affluent markets.
o Focus on branding Branding is a key element of LNC’s strategy. LNC’s
branding efforts are focused on. Two primary target audiences -financial
intermediaries and very affluent consumers.(top 11% of the population). On the
consumer side, LNC’s total company awareness has increased from 22% in 1998
to 39% in 2003. On the trade side, company awareness is very strong at 96% In
2002.

• Weaknesses
o Weakness of the annuity business. For the year 2003, the company’s fixed
annuity sales were $861 million, a decrease of about 30% over the previous year.
This segment is expected to remain weak not only due to market sensitivity but
also due to excess capacity and aggressive competition for variable annuities.
o Sensitivity to equity markets. About one-third of LNC’s earnings are derived
from free-based equity market products. This is an above average exposure to the
equity markets. Though LNC’s annuities, life insurance, money management and
financial planning businesses a benefited from the improving financial markets
experienced during 2003, its high exposure makes it more vulnerable to the
volatilities of the markets.
o Weak operating performance. LNC has disposed of or is running off the
businesses that have caused significant charges, such as reinsurance and its UK
operations. The company’s earning history has been consistently below average.
LNC has had restructuring or other large onetime charges in each of the last five
years. Revenues have been consistently declining over the period 1999-2003 at a
CAGR of 6.1%, excluding 2003 where the company recorded a growth over previous
year

APPENDICES
YTL’S VALUATION RATIOS

Company Industry Sector S&P 500

P/E Ratio (TTM) 21.69 11.80 7.23 43.02

P/E High - Last 5 Yrs. -- 0.62 0.12 24.67

P/E Low - Last 5 Yrs. -- 0.08 0.04 6.17


Beta 0.52 0.68 0.58 1.41

Price to Sales (TTM) 1.93 1.00 1.17 1.96

Price to Book (MRQ) 2.07 1.83 2.02 3.16

Price to Tangible Book (MRQ) -- 2.98 2.49 6.16

Price to Cash Flow (TTM) -- 6.94 3.72 15.36

Price to Free Cash Flow (TTM) 10.09 2.88 16.54 17.60

YTL’S DIVIDENDS

Company Industry Sector S&P 500

Dividend Yield -- 1.45 0.09 1.46

Dividend Yield - 5 Year Avg. 5.35 2.86 3.37 2.80

Dividend 5 Year Growth Rate 9.86 7.85 23.22 9.37

Payout Ratio(TTM) 125.38 39.46 16.64 85.16

YTL’S GROWTH RATES

Company Industry Sector S&P 500

Sales (MRQ) vs Qtr. 1 Yr. Ago 149.47 17.34 -4.65 -5.42

Sales (TTM) vs TTM 1 Yr. Ago 43.83 38.25 9.32 -1.78

Sales - 5 Yr. Growth Rate 12.49 15.41 13.67 16.05

EPS (MRQ) vs Qtr. 1 Yr. Ago -96.90 -7.00 133.89 -20.54

EPS (TTM) vs TTM 1 Yr. Ago -40.23 -- -- --

EPS - 5 Yr. Growth Rate -4.78 14.29 35.28 0.68

Capital Spending - 5 Yr. Growth Rate -- 18.26 15.23 20.51

YTL’S FINANCIAL STRENGTH

Company Industry Sector S&P 500

Quick Ratio (MRQ) 1.67 1.04 0.83 0.77

Current Ratio (MRQ) 1.84 1.15 0.93 0.92

LT Debt to Equity (MRQ) 335.28 121.75 132.96 150.73


Total Debt to Equity (MRQ) 377.07 148.37 159.66 234.35

Interest Coverage (TTM) -- 1.41 0.09 29.57

YTL’S PROFITABILITY RATIOS

Company Industry Sector S&P 500

Gross Margin (TTM) 35.85 36.33 22.90 25.39

Gross Margin - 5 Yr. Avg. 45.52 9.65 8.27 25.03

EBITD Margin (TTM) -- -- -- --

EBITD - 5 Yr. Avg -- 21.65 32.45 14.53

Operating Margin (TTM) 32.86 14.99 18.69 --

Operating Margin - 5 Yr. Avg. 41.19 15.23 19.26 20.11

Pre-Tax Margin (TTM) 22.16 11.05 16.45 6.61

Pre-Tax Margin - 5 Yr. Avg. 28.27 12.44 14.04 19.83

Net Profit Margin (TTM) 10.26 7.97 12.69 5.45

Net Profit Margin - 5 Yr. Avg. 20.41 8.71 9.71 14.02

Effective Tax Rate (TTM) 53.73 27.10 12.54 16.76

Effective Tax Rate - 5 Yr. Avg. 27.82 29.34 32.94 28.47

YTL’S MANAGEMENT EFFECTIVENESS

Company Industry Sector S&P 500

Return on Assets (TTM) 2.00 4.31 5.93 3.38

Return on Assets - 5 Yr. Avg. 3.61 3.99 3.54 5.01

Return on Investment (TTM) 2.39 6.09 9.09 4.61

Return on Investment - 5 Yr. Avg. 4.11 5.48 5.04 6.35

Return on Equity (TTM) 10.03 17.17 13.41 8.23

Return on Equity - 5 Yr. Avg. 15.52 15.63 8.13 14.79

YTL’S EFFICIENCY
Company Industry Sector S&P 500

Revenue/Employee (TTM) -- 1,475,538 4,453,722 483,443

Net Income/Employee (TTM) -- 101,388 325,186 34,136

Receivable Turnover (TTM) 3.61 6.59 3.19 6.97

Inventory Turnover (TTM) 7.74 16.29 19.35 5.36

Asset Turnover (TTM) 0.20 0.56 0.27 0.44

(Source: Reuters ;business and finance site.)

YTL’s Annual Balance Sheet

2007 2005
In Millions of Ringgit 2009 2008 2007-06-30 2006 2005-06-30
(except for per share items) 2009-06-30 2008-06-30 Reclassified 2006-06-30 Reclassified
2008-06-30 2006-06-30

Cash -- -- -- -- --

Cash & Equivalents 307.9 63.5 19.5 7.7 21.8

Short Term Investments 5,704.5 9,406.1 6,054.9 4,775.5 4,529.5

Cash and Short Term Investments 6,012.4 9,469.6 6,074.3 4,783.3 4,551.2

Accounts Receivable - Trade, Net 2,353.2 491.7 434.6 576.4 566.5

Notes Receivable - Short Term -- -- -- -- --

Receivables - Other -- 124.2 117.9 180.2 247.6

Total Receivables, Net 2,353.2 615.9 552.4 756.6 814.1

Total Inventory 858.9 152.7 160.9 153.3 138.2

Prepaid Expenses -- 87.4 106.1 108.4 110.6

Other Current Assets, Total -- 325.5 250.6 206.4 187.7

Total Current Assets 9,224.5 10,651.1 7,144.4 6,008.1 5,801.9

Property/Plant/Equipment, Total - Gross -- 18,855.6 18,251.1 16,964.4 16,658.6

Accumulated Depreciation, Total -- (3,765.8) (3,368.9) (2,840.9) (2,362.8)

Property/Plant/Equipment, Total - Net 17,283.3 15,089.8 14,882.3 14,123.4 14,295.8

Goodwill, Net -- 441.3 441.3 441.3 441.3

Intangibles, Net 6,456.8 3.2 3.5 -- --


Long Term Investments 1,692.2 1,641.5 1,531.4 1,670.8 1,365.8

Note Receivable - Long Term -- -- -- -- --

Other Long Term Assets, Total 58.3 0.0 0.0 0.6 0.9

Other Assets, Total -- -- -- -- --

Total Assets 34,715.1 27,826.9 24,002.9 22,244.3 21,905.6

Accounts Payable -- 183.6 150.1 128.3 109.5

Payable/Accrued 2,300.5 -- -- -- --

Accrued Expenses -- 620.9 566.0 477.0 467.3

Notes Payable/Short Term Debt -- 0.0 0.0 0.0 0.0

Current Port. of LT Debt/Capital Leases 2,526.8 4,031.2 1,033.0 1,064.8 1,510.6

Other Current liabilities, Total 174.7 403.2 347.8 406.0 380.4

Total Current Liabilities 5,002.0 5,238.9 2,096.9 2,076.0 2,467.8

Long Term Debt 20,388.0 13,528.3 13,022.0 11,541.9 11,257.2

Capital Lease Obligations -- -- -- -- --

Total Long Term Debt 20,388.0 13,528.3 13,022.0 11,541.9 11,257.2

Total Debt 22,914.8 17,559.5 14,055.0 12,606.6 12,767.8

Deferred Income Tax 2,783.4 2,199.4 2,308.4 2,327.5 2,362.4

Minority Interest 0.1 0.0 -- -- --

Other Liabilities, Total 460.7 459.9 542.5 570.0 589.0

Total Liabilities 28,634.2 21,426.5 17,969.8 16,515.3 16,676.3

Redeemable Preferred Stock, Total -- -- -- -- --

Preferred Stock - Non Redeemable, Net -- -- -- -- --

Common Stock, Total 2,955.1 2,721.3 2,648.2 2,581.5 2,498.4

Additional Paid-In Capital 1,774.8 1,699.2 1,944.1 2,211.4 2,072.1

Retained Earnings (Accumulated Deficit) 1,470.7 2,340.0 1,843.6 1,405.6 960.2

Treasury Stock - Common (119.8) (360.1) (402.8) (469.6) (301.5)

Total Equity 6,080.9 6,400.4 6,033.1 5,729.0 5,229.2

Total Liabilities & Shareholders' Equity 34,715.1 27,826.9 24,002.9 22,244.3 21,905.6

(Source: Reuters ;business and finance site.)


Financial Statements of AirAsia
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YTL Corporation

• http://www.tradingeconomics.com/Economics/Interest-Rate.aspx?symbol=MYR

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AirAsia

• http://www.midf.com.my/project/midf/media/2009/07/23/111246-387.pdf

• http://www.airasia.com/site/en/pageWithMenu.jsp?name=FAQs&id=2efe4435-
c0a8c85d-177e6b40-8371b4bc&rootId=50ae1200-c0a8c85d-1410a850-
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7f000010-6aa95b00-a2c338c0/name/AA_2Q08_Bursa%20Announcement.pdf
MAS

• http://en.wikipedia.org/wiki/Malaysia_Airlines

• http://www.eturbonews.com/1442/malaysian-airline-returns-profit-2007-exceeds