Highlights

• The allocated RM316m budget by the government to organize various events and festivals (Malaysia Year of Festivals 2015) to accelerate tourist arrivals, which is already gradually improving from MH370 and MH17.

• MAS restructuring will be positive to aviation industry, in terms of less pressure on yields as demand catch up with the slower system capacity growth. Moreover, MAS newly appointed CEO, Mueller has tendency to improve yields and adjusting capacity only to meet demand growth.

• GST implementation and QZ8501 will affect short term travel demand in 1H15, before potential recovery in 2H15, as consumer sentiments normalized.

• Yield pressure to slow in 2015 as system capacity growth slowdown. Nevertheless, we do anticipate lower ticket prices, as airlines pass-back part of the savings from the slump in jet fuels to consumer (some already abolished fuel surcharge), in order to boost air travels and improve load factors.

• Jet fuel price plummeted 50% to US$60/bbl, will improve airlines profitability (jet fuel contributed 40-60% to airlines cost structure), but partially offsets by the impact of depreciated RM against US$ by 8.5% to RM3.60/US$.

• We upgrade our outlook on Aviation to Overweight with BUY recommendation on AirAsia and MAHB. 1) AirAsia: Benefits from the slump in jet fuel price (-50%) will outweigh the impacts from yield decline (-7.6%) and RM depreciation (-8.5%). Hence, AirAsia will be in net benefit position. 2) MAHB: Benefits from improving air travel sentiments in 2015 (low base in 2014 due to air incidents) and full commencement of KLIA2, as well as full consolidation of ISGA earnings turnaround.

Risks

• World crisis (i.e. war, tourism and epidemic outbreak), delay in KLIA2 completion, high jet fuel price and the development of high speed train between Singapore and Pulau Pinang.

Forecasts

• Maintained AirAsia forecasts. Increased MAHB earnings by 23.8% in FY15 and 3.2% in FY16, after consolidating ISGA earnings.

Rating

• OVERWEIGHT

Positives

• Low Jet fuel price.
• Liberalization of ASEAN open sky policy.

Negatives

• Ringgit depreciated against US$.
• Negatives consumer sentiments – Air Incidents and GST.

Valuation

• Maintained BUY on Air Asia with unchanged target price of RM3.15 based on SOP.
• Maintained BUY on MAHB with lower target price of RM8.30 (RM7.70 ex-rights) based on SOP, after assuming lower passenger movement growth.

Source: Hong Leong Investment Bank Research - 5 Feb 2015