Results

• Below Expectation – Reported 4Q14 core earnings at RM103.1m and FY14 at RM345.5m, achieving 72.3% of HLIB’s FY14 forecast and 70.2% of consensus.

Deviations

• Lower than expected yields and higher than expected staff cost and jet fuel cost.

Dividends

• None.

Highlights

• Revenue improved in 4Q14 to RM1.5bn (+12.2% QoQ; +9.2% YoY) due to higher traffic and yields (base fares + surcharges), signaling potential yield recovery in 2015.

• Management is upbeat on yield recovery in 2015, given more rational capacity deployment among the airlines. Indeed, AirAsia itself is planning to reduce its Malaysia fleet from 81 aircrafts to 75 by end 2015. However, capacity is expected to increase by 4-5% by improving aircraft utilization.

• AirAsia is also working towards increasing ancillary income, by leveraging on on-board WiFi services (currently only available on four aircrafts), duty free goods, premium flex, fly-thru, revamped inflight meals and redbox.

• Against general expectations, operating cost increased substantially in 4Q14 (+16.5% QoQ; +17.4% YoY) due to higher provision for staff bonus in the quarter as well as failure of AirAsia to leverage on the slump in jet fuel price.

• Management guided that 50% of FY15 jet fuel requirement is hedged at US$88/bbl, and expecting full year 2015 jet fuel cost at average US$80/bbl, in line with our assumption.

• Management remained upbeat on turnaround of Indonesia AirAsia and Philippine AirAsia, while Thai AirAsia will be the major growth machine in 2015. Only Thai AirAsia and India AirAsia will receive additional 3 aircrafts each, while Japan AirAsia will start operation in 2H15 with 2 aircrafts.

• Asia Aviation Capital (AAC), AirAsia leasing arms has commenced operation, targeting 45 Aircrafts by end 1H15 (to be transferred from AirAsia), which will improve AirAsia cashflow and balance sheets.

Risks

• World crisis (ie. war, terrorism and epidemic outbreak), delay in KLIA2 completion, prolong surge in jet fuel price and high speed train infrastructure between Singapore and Pulau Pinang.

Forecasts

• Unchanged.

Rating

BUY

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

• We remained positive on AirAsia growth in 2015. Maintained BUY with unchanged Target Price of RM3.30 based on SOP

Source: Hong Leong Investment Bank Research - 27 Feb 2015