Stock Name: AIRASIA
Company Name: AIRASIA BHD
Research House: RHB

AirAsia Bhd
(Oct 11, RM2.16)
Maintain outperform at RM2.17 with revised fair value RM3.01 (from RM2.57): Projected to end-FY10 in December with 53 aircrafts, AirAsia's fleet in Malaysia is expected to increase by only four aircraft in FY11 and five in FY12. This follows the deferment that will result in the receipt of only eight new A320 aircraft in FY11 against 25 originally, and 12 new A320 aircraft to be received in FY12 against 24 originally.

But there is a silver lining to the Malaysian operation's limited capacity growth in FY11/12. Overall yields will be boosted, as scarcity in new capacity means only the fastest-growing and highest-yielding routes will be allotted additional capacity.

AirAsia has only hedged forward 40% of its group fuel requirements for 4QFY10 at an effective average price of US$82/bbl (RM255/bbl) to US$83/bbl. It is looking to hedge forward 30% of its group fuel requirements for 1HFY11.

At present, AirAsia expects the initial public offering (IPO) exercises of 49%-owned Thai AirAsia could happen by 1HFY11, 49%-owned Indonesia AirAsia by 2HFY11, and 16%-owned AirAsia X by end-FY11 or early-FY12. We believe the news flow on these three IPOs is likely to sustain interest in AirAsia.

We are raising FY10/12 net profit forecasts by 15% to 28%, largely to reflect stronger yields that more than offset lower capacity growth.

Risks to our view include: (i) the recovery in the air travel sector failing to sustain, (ii) higher jet fuel costs, and (iii) outbreaks of pandemic diseases.

We maintain 'outperform' because we believe the airline sector is poised for improved prospects over the medium term in line with the recovery in the global economy. AirAsia is an attractive proxy, particularly given that it has also finally done the right things such as: (i) starting to deliver more consistent earnings; (ii) adopting a more measured and 'disciplined' growth strategy (less aggressive fleet expansion) to ensure that its gearing level is in check; and (iii) gradually taking back the financial and non-financial support lent to associates Thai AirAsia, Indonesia AirAsia and AirAsia X (via debt raising in their own capacity or IPOs). Indicative fair value is raised by 17% from RM2.57 to RM3.01 based on 12 times revised FY11 EPS, in line with Ryanair. ' RHB Research Institute Sdn Bhd, Oct 11


This article appeared in The Edge Financial Daily, October 12, 2010.