Results

• Within  expectations   –  Reported  core  earnings  at  RM85.4 in 3Q14 and  RM236.3m in 9M14, achieving  53.2% of HLIB’s FY14  forecast,  but  slightly  below  consensus  at  47.4%.  We expect  stronger  earnings  in  4Q14  from  seasonally  strong demand, new ancillary income initiatives (WiFi  and duty free business) and lower jet fuel price.

Highlights 

AirAsia’s  passenger  yield  (including  surcharge)  dropped slightly  1.5%  yoy  to  13.6sen/RPK  in  3 Q14,  but  improved 5.8%  qoq.  Ancillary  income  improved  to  RM44.3/pax.  Management  guided  yield  to  improve  further  in 4Q14, based on current forward  bookings.

The group has hedged 4 3% of jet  fuel requirement in 4Q14 at  US$117/bbl,  21%  in  1Q15  at  US$116/bbl  and  10%  in 2Q15  at  US114/bbl.   Hence,  we  expect  AirAsia  to  be  the major  beneficiary  of  the  recent  slump  in  jet  fuel  price.  At  the  moment,  it  has  no  intention  of reducing/cutting  the  fuel  surcharge.  However,  we  believe that AirAsia may offer further discounted fares (lower yields ) in order  to boost air travelling  in 2015.

The group has again deferred the  some  deliveries of A320s, given  the current overcapacity  issue in the system.

Thai AirAsia  (TAA)  reported  higher  losses of  THB 420m  (vs. THB317.6m  in  2Q14)  despite  higher  RPK  qoq.  TAA  was  facing  stiff  competitions   (from  new  setups ) and low  air-travel  demand,  which has affected  yields.

Indonesia  AirAsia  (IAA )  reported  earnings  turnaround  at IDR1.7bn  as  IAA  completed  network  restructuring  exercise in 3Q14 as well as seasonally stronge r  demand  quarter.

Philippines  AirAsia  (PAA)  remained  in  the  red,  due  to  on going  restructuring  costs.  Similarly ,  AirAsia  India  (AAI)  and Japan  AirAsia (JAA) were  affected  by high start -up costs.

AirAsia  has  started  leasing  business,  which  will  take-over the  current  leased- out  43  A320s  to  associates/JVs,  by March  2015.  The  new  business  is  expected  to  generate income of US$30m in 2015.

Risks

• World  crisis  (ie.  war,  terrorism  and  epidemic  outbreak); US$ appreciation; weak air travel  demand; and high speed train infrastructure  between  Singapore  and Pulau Pinang.

Rating

Trading Buy

• Positives  –  1)  Sustaining lowest cost LCC  operator in Asia with largest network and strong  brand name; 2)  Low jet fuel price;  3)  Inc reasing  ancillary  income;  and  4)  Routes rationalization  of major competitor MAS.
• Negatives  –  1)  Higher  cost  of  living  (from  GST implementat ion and  subsidy rationalization); 2)  Regional airdemand  slowdown  and  political  issues ;  and  3)  US$ appreciation.

Valuation

• Maintained  Trading  Buy  with  unchanged  Target  Price  of RM2.57,  based  on  unchanged  10%  discount  to  SOP  on FY15 earnings.

Source: Hong Leong Investment Bank Research - 20 Nov 2014