Highlights / Comments

• According to Group CEO Tony Fernandes, AirAsia will enter into sales and lease back agreements for the disposal of 11 A320s, which will see AirAsia reporting a disposal gain of US$45m (RM166.5m).

• We are generally positive on AirAsia strategic decision on the deal, which will allow AirAsia to free-up its balance sheet (from heavy debts and gearing ratio) and improve its cashflow with the proceeds of US$271m (RM1bn), as well as taking advantage of the strengthened US$ trend.

• Note that AirAsia has guided for the disposal of its older fleet A320s since early 2014, which has seen a slow progress. Furthermore, it has already set up a new aircraft leasing company, which will eventually take over all the A320s (booked under AirAsia Malaysia) that is currently leased out to JVs and associates.

• Tony has also quashed recent market rumours on AirAsia raising equity cash, given the airline’s strong cash position. Furthermore, the recent disposal of 25% stake in AAE to Expedia has further improved its cash level by US$86.25m (RM320m), adding to its strong cash level of RM1.3bn as at end FY14.

• We concur with the management on the group’s current strong cashflow position. The group aims to reserve its cash level for FY15, after cutting its fleets delivery for the year.

• Management is also expected to uphold its dividend policy of 20% payout from its net operating profits subject to capex requirements (established back in 2011). AirAsia usually only announce dividend payout by end April (not during 4Q result in Feb). For the past 4 years, AirAsia has been paying net dividend of 4sen for FY13, 24 sen (including 18 sen special dividend) for FY12, 5 sen for FY11 and 2.8 sen for FY10.

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

• Unchanged.

Rating

• Buy

Positives

1. Sustaining lowest cost LCC operator in Asia with 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 subsidy rationalization); and
2. Regional air-demand slowdown and political issues.
3. Strengthening of US$.

Valuation

• Maintained Buy with unchanged TP of RM3.30 based on unchanged 10% discount to SOP.

Source: Hong Leong Investment Bank Research - 23 Mar 2015