Results

• Below Expectation – Reported 2Q15 core earnings at RM112.4m and 1H15 at RM240.26m, achieving 37.1% of HLIB’s FY15 forecast and 37.24% of consensus.

Deviations

• Lower than expected yield and higher than expected staff cost, user charges and other expenses.

Dividends

• None.

Highlights

• Revenue improved slightly in 2Q15 to RM1.32bn (+2% QoQ: +1 YoY) owing to higher ticket sales and higher leasing income since RM depreciated against US$. However, Fares/RPK decreased by 10% YoY due to the removal of surcharge.

• Management is upbeat on yield recovery in the 2H15, given MAS officially cut several routes in August (circa 20% of total capacity in Malaysia) which in turn will improved AirAsia ticket yield.

• AAB will leverage on the China market for the 2H15 (e.g. Langkawi – Guang Zhou, Langkawi – Hong Kong) due to improvement in travelling sentiment of China market and the high spending propensity of Chinese passengers.

• Operating cost decrease YoY due to the slump in jet fuel but flattish QoQ due to an increase of staff cost (late bonus).

• On Indo AirAsia (IAA) negative equity issue, AAB are advised to issue non-voting Redeemable and Convertible Preference Shares (RCPS) to address the negative equity issue which will be done through converting AAB receivables from IAA amounting to US$250m (RM1bn). Expected AAB to recognize share of unrecognized losses portion of RM474.2m. IAA Injection of capital by potential investors is still ongoing, with indicative interest of US$40m. Also, IAA Convertible bond issuance is on track, which is expected to be completed by end of the year.

• Management is guiding IAA to be profitable in 2H15 with strong improvement in average fares and load factor driven by cost management and international routes oriented.

• On Thailand recent bombing issues, Thailand AirAsia (TAA) has seen booking affected, though expect this to affect only in the near term. We opine the severity of the recent bombing tragedy might cause a huge dent to TAA bookings.

Risks

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

Forecasts

• Reduced our ticket sales and ancillary income yield, imputed lower fuel cost and increased our MYR/USD assumptions. Net earnings reduced by 10 – 28% for FY15-17.

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 new target Price of RM1.98 (From RM3.11) based on SOP. We excluded IAA valuation from our SOP, reduced our PE to 8 due to market risk, and our holding company discount to 20% owing to weakening regional travelling sentiment and the weak ringgit condition.

Source: Hong Leong Investment Bank Research - 21 Aug 2015