Highlights/ Comments

• AirAsia 1Q15 results will be on 28th May 2015 and we expect the results to be within our expectation of net profit of around RM125m – RM135m for this quarter.

• To recap the highlights in 1Q15; o AirAsia Indo flight QZ8501 crashed in the Java Sea on 28th December 2014, affecting air travels sentiments towards AirAsia group. As a result, AirAsia halted their marketing activities during the first half of 1Q15 as a sign of respect. o Lower jet fuel at average of US$67/bbl (50% YoY). AirAsia Group has announced the removal of fuel surcharge for bookings from 26th January 2015 onwards. o Disposal of 25% stake in Expedia (from 50% ownership) for cash consideration of USD78.5m in 1Q15. We expect a disposal gain of RM280m from the exercise.
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• For 1Q15, we expect improvement in average yield (revenue/RPK) to 11.45 (+7% YoY; -5% QoQ). Lower average yield for QoQ was due to lower marketing campaigns (post QZ8501 incident) and discontinuation of fuel surcharges . Ancillary income expected to remain relatively flat QoQ at 44.21/pax.

• Stronger contribution from associate Thai AirAsia. Thai AirAsia (Known as Asia Aviation) revenue grew by circa 20% YoY driven by an increase of 19.4% passenger carried. Core PATAMI grew exponentially to THB498m for 1Q15 from THB75m for 1Q14. (Due tourism recovery from Thailand military coup and plugged of Jet fuel price). Note that AirAsia does not recognize contribution from other airline JVs/associates.

• On the cost structure, we expect average cost to go down by 6.6% YoY to 839.4m, mainly due cost savings from the lower effective jet fuel price of US$83/bbl (RM284.69/bbl). Hence, based on our forecast, AirAsia Core Net profit would be around RM125m – RM135m for 1Q15.

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

• 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 2) Regional air-demand slowdown and political issues.

Valuation

• Maintained BUY with TP of RM3.11 based on unchanged 10% discount to SOP.

Source: Hong Leong Investment Bank Research - 27 May 2015