Investment Highlights

• We maintain our BUY call on AirAsia with an unchanged fair value of RM3.63 per share, based on 10x CY18 P/E, consistent with its regional and global peers. We make no changes to our FY17-19F earnings forecasts. Key risks to our call include further weakening of MYR against USD, and tougher-than-anticipated competition in the sector.

• AirAsia consolidated its Indonesia AirAsia and Philippines AirAsia accounts in 1QFY17. AirAsia’s 1QFY17 core net profit dropped 16.6% YoY to RM280.7mil. This came within our expectation, accounting for 23% of our full-year forecast, but below consensus at 21%. No dividend was declared.

• Revenue for 1QFY17 grew 7.7% YoY to RM2.23bil. This was driven by a 6.2% YoY growth in total passenger carried to 9.15mil passengers, with revenue passenger kilometres (RPK) increasing 6.8% YoY to 11.97bil. Seat capacity in 1QFY17 edged up 1.1% YoY to 10.3mil seats, with available seat kilometres (ASK) rising 1.9% YoY to 13.59bil. This translated into a 4ppts higher YoY seat load factor to 89%. Revenue/ASK (RASK) increased 3.4% YoY to 14.91 sen, despite average fare dropping 2% YoY.

• Nonetheless, AirAsia’s 1QFY17 net operating profit slipped 20.9% YoY to RM267.1mil, due to higher operating expenses. This was mainly due to a 19.6% YoY hike in average fuel price to US$67/barrel, and stronger USD against MYR. Staff costs also recorded a significant 27% YoY jump to RM363.5mil due to a revised staff remuneration package that was introduced in 4Q16. Overall, group cost/ASK (CASK) climbed 13.7% YoY to 13.61 sen, and CASK ex-fuel 9.3% higher YoY at 8.6 sen.

• AirAsia’s associates registered continuous growth in load factor and total passenger carried in 1QFY17. Thai AirAsia’s revenue grew 2.1% YoY to THB9.16bil, due to a 1ppt higher seat load factor to 89%, and a 10% YoY higher RPK, which outstripped a 7% YoY increase in ASK. However, operating profit dived 44% YoY to THB1.15bil, mainly due to a 8% YoY climb in CASK.

• India AirAsia’s revenue surged 47.2% YoY to INR2.82bil, due to a 3ppt shigher seat load factor to 89%, and a 36% YoY higher RPK, which outstripped a 31% YoY rise in ASK. However, operating loss widened 15% YoY to INR539.1mil, mainly due to a 6% YoY increase in CASK.

• We expect AirAsia to record another strong performance in FY17 due to a sustained strong demand in the region. We also believe the risk of potential further escalation in costs to be minimal, with 80% of its FY17 fuel requirement hedged at US$59/barrel, while the MYR movement against USD has stabilised.

Source: AmInvest Research - 26 May 2017