Kenanga Research & Investment

Author: kiasutrader   |   Latest post: Fri, 13 Dec 2019, 9:38 AM


Aviation - At Compelling Altitudes

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We maintain OVERWEIGHT for the aviation sector backed by AIRASIA’s: (i) capacity expansion of 29 planes in FY18 while retaining high load factors (>85%), (ii) increased domestic frequencies on the back of less competition from MAB and Malindo, and (iii) increased aircraft utilisation to 14 hours (from 13 hours) from shorter domestic routes allowing for shorter turnaround time and subsequently higher capacities i.e. ASKs. We find AIRASIA’s share price compelling at this juncture after it dipped 23% over 2Q18 from negative new flows and rising jet fuel prices, which sparked uncertainty among investors. We advocate investors to look past these short-term pressures as AIRASIA’s business model remains intact and we anticipate oil price levels to subside moving forward as OPEC countries agreed to ramp up oil productions (according to the recent OPEC meeting in June 2018). While AIRPORT’s 5M18 passenger traffic is currently in line with our existing passenger growth forecast of 8.5%; we remain cautious over the QoS framework to be implemented starting 3Q18, which could post earnings risks of up to 35% (for FY18E earnings). All in, as we make no changes to earnings forecast, and maintain our call and TP for AIRPORT (MP; TP: RM8.60 based on 1.72x FY18E PBV) and AIRASIA (OP; TP: RM4.80 based on 9.0x FY18E PER).

2Q18 share price performance. Over 2QCY18, AIRASIA’s share price dropped 23% as it was weighed down by multiple negative news flow (i.e. political-linked, alleged corruption in India), subjected to foreign outflows from the recent change in government, increase in jet fuel prices (+5% QoQ) and weakening of the Ringgit. Meanwhile, AIRPORT’s share price remains marginally unchanged despite being included into the FBMKLCI possibly weighed down by the potential earnings risks from the Quality of Service framework (QoS) to be implemented in 3Q18.

AIRPORT’s traffic numbers deem in line. AIRPORT’s 5M18 total passenger movement for Malaysia and Turkey registered growth of 4.3% YoY-YTD (+1.6 M’sia; +13.1% Turkey) against our forecast of 8.5% (+8.0% for Malaysian ops; +10% for Turkey ops); which we deem in line as we anticipated stronger Malaysian passenger traffic moving forward as AIRASIA deploys more capacity into the domestic routes. Our 8.0% growth estimate for Malaysia is premised on further international growth from China, India and other South East Asian countries due to: (i) visa relaxations and (ii) increased capacities by local and foreign carriers. All in, we make no changes to our passenger growth estimates. Note, our sensitivity analysis indicates that for every 1ppt (from current 8%) decline in Malaysian passenger growth forecast, it will drag earnings lower by 1.5% (or RM6m).

Effective implementation of QoS from 1st July 2018. Meanwhile, the QoS (Quality of Service) framework which will be implemented by MAVCOM starting this quarter (July 1st) for airports (starting with KLIA1 and 2) with objectives to achieve higher quality of service for passengers pose downside risks to AIRPORT’s earnings given that MAVCOM has proposed a financial penalty of up to 5% of aeronautical revenue, which would dent our FY18E CNP by 7% for every 1% penalty. That said, in order to mitigate penalties, AIRPORT has increased their planned capex to RM600-700m (from typically RM300m) in FY18-19 to upgrade their infrastructure, i.e. trains, baggage systems and toilets.

A true ASEAN airline in the making. AIRASIA has completed their internal reorganisation (renamed to AirAsia Group Bhd from AirAsia Bhd) on the 16th of April 2018 of which we are positive on as it allows for further cost reduction through streamlining group cost structure. In line with brand AIRASIA as a pure ASEAN airline, AIRASIA plans to further consolidate their remaining associates namely Thai, India and Japan into their books (currently, it has consolidated Malaysia, Indonesia and Philippines). They have concluded the listing of their Indonesian associate on IDX and aims to have their Philippines associate listed by 2H18. We are generally positive on the listing of its associates as this allows their respective associates to tap into their local capital markets to expedite growth.

AirAsia’s capacity growth continues. For FY17, AIRASIA expanded their fleet by 24 planes and plans for another 29 planes in FY18 (Malaysia +7, Thailand +7, Indonesia +3, Philippines +5, India +7) bringing total aircraft capacity by end-2018 to 225 planes. We are positive on the planned capacity increase as we foresee AIRASIA being able to maintain healthy load factors of >85% while sustaining airfare prices stemming from: (i) strong travel demand in the long run, coupled with their (ii) extensive route options with optimal frequencies, (iii) higher digital conversion rates from simpler website navigation and mobile application, (iv) targeted marketing, and (v) dynamic pricing strategy. Note that despite the increased ASKs of 18% QoQ for 1Q18 (from increased fleet and higher plane utilisation), RASKs were only marginally compressed (-2%). We believe this is due to AIRASIA increasing their market share through trunk routes as other domestic airlines (Malindo and MAS) rationalised frequencies to avoid price wars. In addition, AIRASIA is continuing to push for a higher aircraft utilization rate of 14 hours (previously 13.1 hours in 1Q18) by focusing on shorter domestic routes in FY18, allowing for shorter turnaround times. All in, we expect ASK growth of c.6% translating to revenue growth of c.11%.

Value unlocking. In line with AIRASIA’s promise to dish out special dividends at least once every two years, we are positive on AIRASIA’s plans to continue unlocking assets. While AIRASIA has recently announced the long-awaited sale of their leasing arm AAC, we believe this is among the first of many more assets to be unlocked such as: (i) Expedia (expected sale in 3Q18), (ii) their inflight F&B business ‘Santan’, (iii) ‘ROKKI’, which provides wifi service onboard, and (iv) Red Cargo.

Look past the short-term pressures and maintain OVERWEIGHT. While jet fuel prices are increasing (with average 2Q18 jet prices at USD81/bbl), we take a stance that fuel price is unlikely to chart new highs given that OPEC countries have agreed to ramp up oil production by 1.0m bbl/day (agreed on June 2018) which we believe would bring oil prices down towards more sustainable levels in the near-mid-term. Therefore, we are maintaining AIRASIA’s fuel price assumptions of USD70/bbl (on unchanged USD/MYR of 4.0) for FY18/19. Based on our estimates, assuming a USD10/bbl (from USD70/bbl) hike in fuel price, our FY18E net profit for AIRASIA would decline by 23% (or RM350m); bringing our TP down to RM3.85 (from RM4.80; based on unchanged Fwd PER of 9x) which still commands a lucrative upside against current share price levels. Hence, we believe AIRASIA’s current valuations are compelling and advocate investors to look past these short-term pains. All in, we remain OVERWEIGHT on the sector mostly backed by AIRASIA’s (OP; TP: RM4.80) rapid growth plans.

Source: Kenanga Research - 4 Jul 2018

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