- We reaffirm our BUY call on Airasia and maintain our FV at RM3.10/share. Airasia reported 3Q14 core net profit of RM86mil, which brought 9M14 core earnings to RM244mil. This is broadly within expectations accounting for 46% of our and 49% of consensus forecast given a seasonally strong 4Q.

- Core earnings almost tripled QoQ (despite the 3Q14 being a seasonally weak quarter) as Airasia is starting to benefit from lower jet fuel price (albeit diluted as it is 40% hedged at USD118/barrel vs. spot jet fuel of USD116/barrel in 3Q14). CASK was down 11% QoQ and ex-fuel, was down 6% QoQ driven mainly by lower fuel and maintenance cost.

- YoY, earnings contraction narrowed to -48% from -78% in 2Q14. Fleet size is still inflated as Airasia Malaysia still had six idle aircraft in the period. But these are expected to be reactivated in 4Q14.

- Yields saw its maiden quarter of sequential growth this year, growing by 6% QoQ, while the YoY yield contraction narrowed to only -1.5% (from -2.2% in 2Q14) – this underpins the YoY yield recovery trend seen over the past three quarters (See Exhibit 2). Judging by more rational capacity deployment in the industry, we think yields are on track towards positive YoY growth in the next two quarters.

- That said, RASK has already shown two consecutive quarters of positive growth, up by 2% YoY this quarter. Despite flattish pax and yield growth, expansion in ancillary income per pax (+8% YoY, +5% QoQ) drove revenues higher (+3% YoY, +0.5% QoQ).

- Idle aircraft (for Malaysia) reduced to six from eight in 2Q14, and the majority is on track to be reactivated in 4Q14, eliminating the drag from underutilised assets going forward.

- Secondly, fuel cost trends are improving with even lower spot jet fuel price in 4Q14 and as Airasia works off its remaining fuel hedges by year end. For FY15, only 12% of requirement is hedged, which means the full benefit of cheaper jet fuel should trickle in more significantly in 1Q15.

- Only a net one aircraft will be added to Malaysia Airasia (four deliveries deferred and another four to be sold) in FY15, which further underpins yield recovery over the next 12 months. 2Q14 earnings were the bottom and 3Q14 is already showing sequential earnings recovery.

- At 9.5x FY15F earnings, Airasia is trading at close to trough PE of 8x, amid a potentially strong V-shaped earnings recovery. Spot jet fuel is 15% lower than our assumption of USD115/barrel, while MYR:USD is only 4% higher than our assumption of 3.2 – meaning risk to our forecast leans heavily towards the upside.

Source: AmeSecurities