Highlights/Comments

• Management are focusing on its yield enhancement initiatives; leveraging on MAS restructuring, improving average fares, load factor and ancillary income and reducing cost (through headcount reduction and increase automation).

• Recently, AirAsia has stopped their marketing activities for most of the first half of 1Q15 arising from the QZ8501 incidents (whereby the flight bound to Singapore crashed in Java Sea on 28 December 2014). Thus, Load factor is expected to fall in 1Q15 to circa 74% for Malaysia’s operation (vs. HLIB’s assumption of 78%) which is a drop of 10% yoy. However, AirAsia is still expecting an improvement in ticket yields in FY15 (HLIB estimates at 8%).

• Ringgit has depreciated to circa RM3.70/US$. This will directly impact AirAsia bottom-line. Hence, we raise our US$ estimates to RM3.60 for FY15 – FY16 (previously RM3.50). Currencies where Airasia’s associates are operating have also appreciated against RM, this will translate into lower associate contributions.

• AirAsia’s group has hedged 50% of its fuel requirement at US$88/bbl for 2015 which suggests effective cost of US$80/bbl, in line with our forecast. Management is actively looking at Jet fuel price for FY16 potential hedging.

• On associates, 1Q15 is expected to be positive for all associates (except for AirAsia Indo). Thai AirAsia might see a setback if ban imposed by Japan, China and S. Korea prolonged. On AirAsia India, they are still in the midst of establishing themselves in the country by building scale and increasing frequencies. While AirAsia Philippines are performing well with cost cutting initiatives and route rationalization.

• Despite the unfavorable forex movements and the short-term setback from QZ8501, we remained upbeat about AirAsia, with lower effective Jet fuel price of US$80/bbl. (vs. US$122/bbl in FY14), recovery in 2HFY15 and management continuous initiatives to improve yields as well as reduce cost.

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 higher yield removal of surcharge and higher US$, we have decreased FY15-16 earnings by -29.1% and -41.1% respectively.

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 2) Regional air-demand slowdown and political issues.

Valuation

• Despite lower forecasts, we remained positive as the lower jet fuel price alone is more than sufficient to offset forex impact to help the group to post strong growth. Maintained BUY with lower TP of RM3.11 (from 3.30) based on unchanged 10% discount to SOP.

Source: Hong Leong Investment Bank Research - 6 Apr 2015