-  We maintain our HOLD call on Airasia but lower our fair value to RM2.10/share (from RM2.50/share previously) given the very weak 2Q14 results.

-  The group reported core net profit of only RM23mil in 2Q14, which brought 1H14 core earnings to RM158mil. This is well below expectations ad accounted for 24%-26% of our and consensus estimates.

-  Cost increase outpaced revenue growth significantly in 2Q14. Operating cost was up 13% YoY vs. a 5% rise in revenue (see table 2). Cost base was bloated as aircraft count increased to 80 from 72 in 1Q14 and 66 in 2Q13. However, this should be temporary as four aircraft are expected to be taken out for Airasia India. Another six are to be included in the pool of aircraft for sale by year end, although this is being re-looked at.

-  Further contributing to this is deteriorating asset utilisation. ASK generation per aircraft dropped by some 15% YoY and 3% QoQ. This essentially translates into a more pronounced operating leverage, which compounds the affect of lower yields and load factor on profits during the period.

-  Yields significantly surprised on the downside, falling by another 2% YoY (-6% QoQ) to 12.9sen despite flattish ASK growth (+1% YoY) during the period. MAS’ aggressivecapacity growth still affected Airasia in 2Q14, although the latter significantly reduced capacity growth.

-  The bulk of the improvement in RASK (+2% YoY) was driven by higher aircraft lease income, which we understand does not generate much profit as these are leased to Airasia’s associates. Ticket sales revenue was largely flat and the only real growth came from ancillary income (+10% YoY, +4% QoQ). Forward bookings look weaker (see table 3), while base fare pattern is flattish overall.

-  MAS restructuring plan will likely determine Airasia’s decision on capacity. Airasia may reaccelerate capacity growth. The reacceleration does not seem firm yet, but Airasia has the flexibility to do so by taking back some of the aircraft that are allocated for sale.

-  We have cut our projections by 21%/22%/22% for FY14F/15/16. Weak forward loads and still lower forward pricing YoY are risks, but we think that the market’s focus will now shift to searching for the inflexion point rather than figuring out how much worse things can get for Airasia. At 13.5x FY14F earnings however, valuations are not exactly cheap versus LCC peers’ average of 14x. 

Source: AmeSecurities