Results

In Line – Reported 1Q13 core earnings of RM155.4m, or 18.8% of HLIB’s forecast and 17.2% of consensus. Historically 1Q is weaker and only contributing 15-20% to full year earnings.

Highlights

1Q13 pax yield (ticket sales + surcharges/RPK) increased by 1.3% yoy to 15.6 sen mainly attributed to higher surcharges. Average ancillary income improved slightly to RM42/pax (+6.0% yoy; +1.1% qoq) vs. targeted RM60/pax.

AirAsia (AA) remained upbeat with Malaysia and brushed off immediate threat from Malindo, as the competitor cut flight frequency and possibly incurring losses. AA has reduced its aircraft allocation to 6 in 2013 (previously 10).

Contributed RM31.7m to AA, TAA experienced passenger growth of 20.4% yoy after moving to Don Mueang, allowing capacity growth (vs. congested Suvarnabumi).

IAA maintained its leading position in the international market, while doubled up its domestic market share to 4%, after increasing its distributional channel to 3,500. IPO is likely to be in 4Q13 or 1Q14.

PAA completed acquisition of 85% Zest in May. Full integration between PAA and Zest expected by end 2013. Total combined fleet will be 13, with additional 3 by year end. PAA will incorporate its modus operandi into Zest Air, while take advantage of Zest’s landing slot in Manila.

JAA continued to bleed with RM67m losses due to management issues. AA is in talks with ANA to turnaround JAA. AA remained bullish in Japan market with additional 4 aircrafts in 2013.

With jet fuel above US$100/bbl, AA Group will continue to impose fuel surcharge. AA has hedged 35% of jet fuel requirement for the remaining of 2013 at US$123.75/bbl vs. current level of US$115/bbl.

Risks

World crisis (i.e. war, terrorism and epidemic outbreak), delay in KLIA2 completion, prolong surge in jet fuel price and high speed train infrastructure between Singapore and Pulau Pinang.

Forecasts

Increased FY13-15 earnings by 5-8% on lower jet fuel cost assumption to US$125, US$128 and US$130 from US$130, US$135 and US$138, respectively.

Rating

HOLD

• Positives –
  • Beneficiary of strong air traffic into Malaysia, in line with government initiatives to boost tourism sectors.
  • Largest and lowest cost LCC in Asia with strong brand name.
  • Strong ancillary income.
• Negatives –
  • High jet fuel cost.
  • Entry of Malindo Airways enforcing price competition.

Valuation

• Maintained Hold at higher TP of RM3.08 based on SOP.

Source: Hong Leong Investment Bank Research - 23 May 2013