Results

• Within Expectation – Reported 1Q15 core earnings of RM127.9m, achieving 19.8% of HLIB’s FY15 forecast and 16.7% of consensus. Deviation

• Expect better performance from AirAsia going forward as 1Q15 usually is the weakest quarter and normalization post- QZ8501 and GST

Dividends

• Final dividend of RM 3 sen per share. 24.8% payout ratio.

Highlights

• Healthy revenue is recorded at RM1.3bn -0.4% YoY due to the discontinuation of fuel surcharge as well as from lower marketing campaign (post QZ8501 incident). Ticket yield (rev/RPK) drop by -7% YoY.

• Ancillary income 2Q15 target is RM49/pax, full year target remains at RM50/pax. Management optimistic that new ancillary products (Duty free website launched in April and AirAsia EZpay) would spur income for 2Q15. However, we expect Flythru to perform better as more traffic feed from AirAsia X going forward.

• Operating cost lowered by -6.1% YoY mainly due lower jet fuel cost. Average Jet fuel price was US$88/bbl in 1Q15 vs. US$122/bbl in 1Q14. Guiding for jet fuel cost to trend down further next few quarters, due to lower hedged price.

• Management is actively improving cost structures, through: 1) head count rationalization (Synchronizing with the whole AirAsia group); 2) Automation (cost savings of circa RM22m); 3) higher utilization of ai rcraft; and 4) reduction of airport charges (Langkawi and Changi).

• During the quarter, AirAsia reduced its 50% stake in Expedia to 25% and registered a disposal gain of RM320.5m. Expedia re-categorized to investment from JV.

• AirAsia has also provided losses of RM38.6m for the disposal of 16 A320s (expected to complete by 2Q15).

• Management is actively monitoring MAS restructuring exercise, for strategizing capacity planning for the year. Intend to avoid head to head competition to maintain healthy yield envi ronment. They noted MAS has removed many domestic routes (in line with its rationalization plan to be a regional oriented carrier) and some international routes. Moreover, forward bookings showed strong growth for the whole group, with the exception of IAA (domestic flights)

• Thai AirAsia (TAA) did exceptionally well with profits of THB922m (on the back tourism recovery). Indonesia AirAsia (IAA) did poorly this quarter, due to QZ8501 incident. Both AirAsia Philippines (PAA) and AirAsia India shows promising growth with improving load factor and yields.

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 Penang.

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

• Maintained BUY with unchanged Target Price of RM3.11 based on SOP

Source: Hong Leong Investment Bank Research - 29 May 2015