Highlights/ Comments

Recently,  j et  fuel  price  dropped  significantly  to US$100/bbl,   line  with  the  plunged  in  global  crude  oil  price, on  major  increase  in oil  production  (supply) with subdued global  demand  (especially  concern  about  the  slowdown  in Eurozone and China). We expect  jet fuel price to remain at around current level of US$100/bbl in 4Q14 and FY15-16.

Lower  jet  fuel  price  is  beneficial  to  AirAsia ,  given  jet  fuel contributed  60-67%  of  its  operational  cost.  However,  we believe that  AirAsia will cut its average yield (including fuel surcharges),  in  order  to  induce   air  travels  in  the  current weak demand environment.

For  every  5%  change  in  jet  fuel  cost,  AirAsia’s  EPS  will change  by  11.9%  in  FY15  and  9.3%  in  FY16.  Note  that  jet fuel price has dropped by 20%  ytd.

US$  has  also  appreciated  against  regional  currency including  RM,  THB  and  IDR  in  recent  month s.  We  expect RM/US$  to be stable at current level.

Major  components   of AirAsia’s cost structure   (i.e.  jet fuel, maintenance,  leasing,  interest,  etc)  are  denominated  in US$.  Hence,  strengthened  US$  will  worsen  AirAsia’s bottomline.

For  every  5%  change  in  US$/RM, AirAsia’s EPS will change by  18.3%  in  FY15  and 14.6% in FY16. Note that  US$/RM  is currently at the same level as end-2013 (See Figure  #4).

With  the  recent  air  incidents  (MH370 and MH17), kidnapping incidents as well as  regional country issues , the demand for air  travel  has  been  affected  considerably  despite  the  low yields  environment.  We expect  yields to remain depressed in the near term  as the overall demand recovers to match the on-going system  capacity adjustments.

Risks

World  crisis (ie. war, terrorism and epidemic outbreak); surge in  jet  fuel  price;  US$  appreciation;  weak  air  travel  demand; and  high  speed  train  infrastructure  bet ween  Singapore  and Pulau Pinang.

Forecasts

• After  imputing  for  potentially  lower  yield,  lower  jet  fuel  cost and  higher  US$,  we  have  increased  FY15  and  FY16 earnings by 2.8%  and 5.0%.

Rating

Trading Buy

Positives  –

• Sustaining  lowest  cost  LCC  operator  in  Asia  with  largest network and  strong  brand  name.
• Low jet fuel price.
• Increasing  ancillary income.
• Routes rationalization  of major competitor MAS .

Negatives  –

• Higher  cost  of  living  faced  by  consumers  (from  GST implementation  and  subsidy rationalization).
• Regional  air-demand  slowdown  and  political issues.

Valuation

• Upgrade  to  Trading  Buy  with  higher  TP  of  RM2.57  (from RM2.20)  after  im puting  10%  discount  to  SOP  (from  20%), given  lower  concern  on  major  overcapacity in the system, as MAS undergoing  restructuring  exercise.

Source: Hong Leong Investment Bank Research - 21 Oct 2014