Highlights / Comments

• Jet fuel price plunge d significantly to US$60/bbl (dropped 50% vs. US$120/bbl in early 2014), in-line with the slump in WTI crude oil price to US$45/bbl, due to global production oversupply issue.

• AirAsia is benefiting from the slump in jet fuel price , given 60-63% of its operational cost is attributed to jet fuel . AirAsia has hedged 50% of jet fuel requirement for 2015 at US$88/bbl with the remaining 50% leveraging on current US$60-65/bbl level (average for FY15 likely to be below US$80/bbl). We have assumed average jet fuel cost at US$80/bbl in 2015 and US$85/bbl in 2016.

• Contrary, US$ has also appreciated against regional currencies (RM, THB and IDR). Currently, the exchange rate is RM3.58/US$ (RM depreciated 8.5% vs. RM3.30/US$ in early 2014). Major components of AirAsia’s cost structure (i.e. jet fuel, maintenance, leasing, interest, etc) are denominated in US$. We have imputed RM3.50/US$ for 2015-2016.

• The recent air incidents QZ8501 will have negative impact on short term air travel demand in the region (post MH370 and MH17 incidents). However, we are still positive about long term growth of air travel demand in the region.

• We do not expect AirAsia to face severe fines from QZ8501, while the insurance is likely to cover the compensations and aircraft recovery expenses.

• Nevertheless, we expect short term yield depression as AirAsia Group offer promotional fares to boost air travel confidences and maintain its load factor at 80%. We have conservatively assumed average yields (including surcharge) to drop 7.6% in 2015.

• Overall, we expect AirAsia to register stronger earnings in 2015, given the significant benefits from lower je t fuel prices will only be partially offsets by the lower yield and US$ appreciation.

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 between Singapore and Pulau Pinang.

Forecasts

• After taking into consideration of lower yield, lower jet fuel cost and higher US$, we have increased FY15-16 earnings by +23.4% and +10.5% respectively.

Rating

• Buy

Positives

• 1) Sustaining lowest cost LCC operator in Asiawith largest network and strong brand name; 2) Low jet fuel price; 3) Increasing ancillary income; and 4) Routes rationalization of major competitor MAS .

Negatives

• 1) Higher cost of living faced by consumers(from GST implementation); and 2) Regional air-demand slowdown and political issues.

Valuation

• Upgrade to Buy with higher TP of RM3.30 (from RM2.64) based on unchanged 10% discount to SOP.

Source: Hong Leong Investment Bank Research - 16 Jan 2015