Results

In Line – Reported 2Q13 core earnings at RM119.1m and 1H13 at RM272.5m, achieving 33.2% of HLIB’s FY13 forecast and 30.7% of consensus. We consider this in line as we expect stronger earnings in 2H13 on seasonally stronger air travel demand in the region.

Deviations

None.

Dividends

None.

Highlights

Despite the strong load factor of 83.3% in 2Q13, pax yield (ticket sales + surcharges/RPK) has dropped significantly to 13.8sen/RPK (-10.6% yoy; -11.2% qoq), which we believe the main reason to be pricing competition with MAS and Malindo Air as well as weak seasonality. Forward bookings have also trended down from the stiff competition.

Similarly, 2Q13 average ancillary income also dropped to RM39/pax from RM42/pax in 1Q13.

The weaker yield and ancillary income were partly offsets by lower average unit cost, mainly attributed to lower jet fuel cost in 2Q13 at US$124/bbl vs. 2Q12’s US$133/bbl.

Thai AirAsia (TAA) continued to report strong earnings in the seasonally weak 2Q13, contributing RM22m to AirAsia. TAA is benefitting from the increasing number of visitors from China. TAA plans additional of 6 Airbus in 2H13 (currently 29 Airbus), and re-opens Chiang Mai hub in Nov 2013.

Indonesia AirAsia (IAA) continued to gain market share - targeting international segment at 45% (from 42%) and domestic segment at 7% (from 2%), by adding 7-8 Airbus (from 22 Airbus) in 2013 to improve frequencies and network coverage. AirAsia is only expected to start recognize earnings from IAA post IPO exercise in 1H14.

The acquisition of 85% Zest Air by Philippines AirAsia (PAA) has increased PAA’s market share and network coverage in Philippines. PAA is in the midst of integration with Zest, to improve operational efficiencies.

The strengthened US$ against regional currencies since June will adversely affect AirAsia’s operation costs in 2H13.

Jet fuel price has trended up to US$125/bbl from low of US$110/bbl in mid April. AirAsia has hedged ~35% of its total budgeted fuel consumption in 2H13 at US$123.75/bbl.

Risks

World crisis (ie. 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

Unchanged.

Rating

HOLD

Positives – 1) Beneficiary of strong air traffic into Malaysia, in line with government initiatives to boost tourism sectors; 2) Largest and lowest cost LCC in Asia with strong brand name; and 3) Strong ancillary income.

Negatives – 1) High jet fuel cost; 2) Strengthening of US$; and 3) Stiff competition from MAS and Malindo Air.

Valuation

Maintained Hold with unchanged Target Price of RM3.08, based on 20% discount to SOP.

Source:Hong Leong Investment Bank Research- 22 Aug 2013