Investment Highlights

• We maintain our HOLD recommendation on AirAsia with an unchanged fair value of RM2.86/share pegged to an 8x post-special dividend FY20F PE plus 90 sen special dividend (that will be distributed in Aug 2019).

• The Kuala Lumpur High Court yesterday ordered AirAsia to pay RM40.6mil to Malaysia Airports Holding Bhd (MAHB) over unpaid airport charges. AirAsia has decided to appeal the court's decision.

• To recap, the government gazetted the equalisation of passenger service charge (PSC) at all airports in Malaysia in January 2017. Following this, the equalisation of PSC for non-Asean international passengers of RM73 came into effect. However, AirAsia has been collecting RM50 instead of RM73 for international PSC.

• Assuming AirAsia is unsuccessful in its appeal, the amount will erode its FY19F earnings by 6.1% and its book value by 0.5% or 1.2 sen.

• We continue to like AirAsia as it is a good proxy to the growing low-cost air travel market in the region, underpinned by rising per capita incomes and a young demographic. Its strong market presence (in terms of the number of routes, and frequencies for each route) enables it to compete effectively against its rivals (both low-cost and full-service).

• However, we are mindful of its higher cost structure arising from its planes that are now largely leased vs. owned previously. This will be partially mitigated by its strategy to aggressively grow its topline, with a tailwind from the positive outlook for Malaysia’s tourist arrivals (+8.8% to to 28.1mil in 2019F based on Tourism Malaysia’s forecast) over the immediate term as Tourism Malaysia rolls out promotional efforts ahead of Visit Malaysia Year 2020

Source: AmInvest Research - 19 Jul 2019