- We raise aviation to OVERWEIGHT from NEUTRAL as we take out MAS from our coverage list ahead of its de-listing and given the improving industry fundamentals. Airasia is now the only airline under coverage with a BUY (FV: RM3.10/share).
- OPEC’s decision to maintain production volume has driven global crude oil price down even further. Brent crude oil price now stands at USD68/barrel, a 19% MoM fall. Crack has reduced by a smaller quantum and therefore jet fuel is down by a smaller 13% over the same period.
- Airlines are one of the biggest beneficiaries of falling oil price and this is one of the key factors underpinning our upgrade of Airasia recently. High operating leverage (fuel accounts for 40%-50% of operating cost and is the biggest variable cost component) means bottomline impact is significant.
- For LCCs, the impact theoretically is more pronounced as jet fuel tends to account closer to 50% of cost (vs. circa 40% for full service carriers). Every 1% change in jet fuel price impacts Airasia’s FY15F earnings by 2.4%.
- Asian airlines saw share price appreciate 10%-20% (vs. Airasia’s +8%) last Friday on the back of OPEC’s decision.
- Another big positive is that Airasia has very little hedges moving into FY15F (only circa 12% of annual requirement vs. up to 40% in FY14), meaning that it will benefit tremendously from cheaper spot jet fuel from 1Q15. That said, 4Q14 should already see some of the benefit of cheaper jet fuel trickling in.
- The RM1bil Sukuk raised by Airasia comes at good time as it gives it much better liquidity to lock in current weak fuel price and again; this is another Airasia-specific positive. Circa 15% of the Sukuk proceed have been allocated for working capital.
- Yield outlook is looking a lot better as the exceptionally depressed yields experienced over the past 16 months driven by aggressive competition from MAS is easing. Airasia in its recent results teleconference indicated of higher forward yields (on a YoY basis), which signals a first positive YoY growth since 2Q13.
- Our forecast for Airasia is still conservative at this stage, modeling in average jet fuel price of USD115/barrel for FY15F-17F. Spot price is currently 24% lower than our assumption, suggesting significant upside risk to our forecast should the oil price weakness sustain. Inflection point in earnings revision cycle has been reached and a V-shaped recovery looks very likely over the next 6 months. Valuations are close to the trough of 9x.
Source: AmeSecurities
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