Results

Below expectations – Reported 2Q14 core losses at RM13.4m, which dragged down 1H14 earnings to RM113.5m, achieving 19.7% of HLIB’s FY14 forecast and 18.6% of consensus.

Deviations

Lower than expected yields and associates contribution.

Dividends

None.

Highlights

Stiff competition with MAS and Malindo has further pressure yields in Malaysia market. AirAsia’s passenger yield (exsurcharge) dropped to 10.54sen/RPK in 2Q14 (lowest in five years). Ancillary income was sustained at RM42.2/pax.

Domestic airlines have started to re-adjust capacities in 2H14, due to unsustainable yields from irrational competitions. The restructuring of MAS will likely see capacity cuts by end 2014, which will be to the favour of AirAsia Group. Hence, we expect yields to only improve towards end 2014.

Thai AirAsia (TAA) reported losses of THB317.6m (AirAsia recognized RM13.8m losses), due to political crisis in Thailand. TAA was suffering from lower yields and higher marketing expenditures. The demand is expected to improve in 2H14, as the interim government removed curfews and encourage tourism activities.

Indonesia AirAsia (IAA) remained in the red with IDR340bn losses (not recognized by AirAsia), due to weakened IDR, low travel demand and higher operational cost. IAA is undergoing routes rationalization exercises and targeted to turnaround only in 4Q14.

Philippines AirAsia (PAA) reported losses of RM12.4m, as PAA is still integrating AirAsia Zest operations, in order to align networks, maximize yields and lower operational costs. PAA is targeted to turnaround in 4Q14.

AirAsia India (AAI) incurred RM13.8m losses, as it only has one A320 to operate for domestic flights. Depending on government’s approval for international routes, AAI may increase the fleets to six A320s by year end.

AirAsia has formed Private Equity Investments division to monetize its investment in Expedia, BIG, EXPay, Tune Insurance and upcoming Aircraft Leasing.

Risks

World crisis (ie. war, terrorism and epidemic outbreak), surge in jet fuel price and high speed train infrastructure between Singapore and Pulau Pinang.

Forecasts

Cut earnings by 22.8% for FY14 and 1-3% for FY15-16, accounting for lower yields environment in FY14.

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 RM2.20 (from RM2.22), based on unchanged 20% discount to SOP on FY15 earnings

Source: Hong Leong Investment Bank Research - 21 Aug 2014