Results

Below – Reported 4Q13 core earnings at RM186.4m and FY13 at RM619.8m, achieving 92.7% of HLIB’s FY13 forecast and 86.0% of consensus.

Deviations

Lower than expected yields and contribution from associates.

Dividends

None.

Highlights

FY13 average yield has dropped significantly by 17.6% yoy in order to sustain the average load factor for the year at 80.2%. Average ancillary income improved slightly by 2.6% yoy to RM40.4/pax.

AirAsia group will defer 7 A320s in 2014 and 12 A320s in 2015 CEO (current engine option) into NEO (new engine option), which will be delivered over the period of 2016-2026 (slower short term capacity expansion plan), in view of the short term problem at each of the country it operates.

The group will also embark on aircraft (existing fleet older than 10 years old) disposal plan in 2014, with initial target of 6 A320s (from Malaysia). The management expects US$120m proceeds from the sales, which will be used to fund the delivery of new A320s (replacement fleet).

The group will take 28 A320s in 2014, with 14 for Malaysia (replacing the existing 6 and swap 4 to India); 8 for Thailand and 6 for India. Regarding Japan AirAsia, the potential JV will only commence operation earliest by 2015. Net additional aircraft in Malaysia is only 4 A320s in 2014 (estimated additional ASK capacity by 4% in 2014).

The management takes a cautious view on Indonesia by not adding new aircraft in 2014, given the uncertainty of general election and the economy (coupled with IDR depreciation). Furthermore, the planned IPO exercise has been scrapped.

We concur with management’s view on overall yield to remain depress in 2014, given the continued stiff competitive pressure exerted by MAS. Similar to MAS, AirAsia will focus additional capacity to international routes.

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

We have cut our FY14-15 earnings by 21.2% and 11.9%, after factoring lower capacity growth and lower average yields. We introduce FY16 earnings at RM978m.

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 lower Target Price of RM2.22 (from RM2.40), based on 20% discount to SOP.

Source:Hong Leong Investment Bank Research - 27 Feb 2014