- Notwithstanding weak 4Q14 earnings, we maintain our BUY on Airasia and nudge up our fair value to RM3.30/share (from RM3.20/share previously) given the upward adjustments to our FY15F forecast.

- Airasia’s core 4Q14 net profit came in at RM101mil, bringing FY14F core earnings to just RM344mil (67% of our forecast and 70% of consensus). The deviation came mainly from:- (1) higher than expected fuel cost of USD120/barrel average in 4Q14 vs. our assumption of USD106/barrel; and (2) lower than expected load factor and pax traffic, (3) Bonus provisions which inflated staff cost.

- The key drag i.e. higher-than-expected jet fuel cost is merely timing effect of uncovered purchases as well as hedging losses and does not derail our thesis of a strong rebound in FY15F earnings.

- 4Q14 yield of 13.9sen is the maiden quarter registering positive growth (+13% YoY, +2% QoQ) after six consecutive quarters of contraction (See Exhibit 2). In fact, a positive surprise was that indicative 1Q15 yields remain similar to that of 4Q14 (which is seasonally strongest for airlines), suggesting the yield uptrend is sticking.

- Capacity is being managed prudently in FY15F (net reduction of five aircraft for Malaysia) as management is placing highest priority on reviving industry yields, and building up cash position (disposing of two aircraft and moving six older aircraft to Thailand and India). Deliveries have been deferred from 17/28 to only 9/9 (at group level) for FY15F/16F.

- We tweak higher our FY15F/16F earnings by 3%/4% to reflect:- (1) lower load factor (from 82% to 77%-80%), (2) higher USD-MYR (at 3.5 from 3.4); (3) higher fuel hedge cover for FY15F i.e. 50% at USD88/barrel jet kero (from 14%); and (4) a 2% yield growth for FY15F from -8% previously as the elimination of fuel surcharge was more than made up by higher base fares .

- Having said that, 1Q15 pax traffic could see impact from a freeze in advertising following the QZ incident (lasting for almost 2 months) – indicative 1Q15 loads are weaker at 74%. Nonetheless this is temporary and should be made up by lower fuel which will finally trickle in, on top of higher YoY yields.

- At just 10x FY15F EPS, Airasia is deeply undervalued in relative to peers (13x average FY15F PER) amid a sharp upturn in its earnings cycle.

Source: AmeSecurities