Highlights/ Comments

• AirAsia (AAB) announced through its wholly-owned subsidiary Asia Aviation Capital Limited (AACL) that it has agreed to enter into a leasing transaction of 5 A320-200s to Indonesia AirAsia X (IAAX).

• IAAX will lease these 5 A320-200s aircraft for a period of (not limited to) 12 month and pay USD350k per month to AACL. (IAAX will be paying similar rate as previous lessee, Indonesia AirAsia (IAA)). In total, AACL will receive USD21m from this leasing exercise.

• Prior to the agreement, these aircraft were being leased by Indonesia AirAsia (IAA), which is currently experiencing excess capacity (IAA facing difficulties in domestic flights due to government regulation of the ceiling price and Batik Air aggressive capacity addition) and will subsequently return these aircrafts to AACL. Nevertheless, IAAX is in need of aircraft for its expansion requirement (Currently IAAX operating with 2 aircrafts).

• We expect these aircrafts will be slotted into the Australian route to entrench IAAX position and deter any potential competitor of this route. (Batik Air is contemplating to venture to Perth, Australia). Currently, IAAX flying from Denpasar to Melbourne, Taipei and Jakarta

• We are neutral on this news as; 1). There are no idle aircraft (all with contracts) on AACL books; 2). IAA facing challenges in its domestic routes which might drag potential turnaround; 3). IAAX might have taken in these aircrafts prematurely.

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

• We make no changes to our forecasts as IAA will still be loss making even without these leases charges to AACL while the foregone lease payment from IAA will be replaced by IAAX

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 to BUY with TP of RM1.98 based on unchanged 20% discount to SOP.

Source: Hong Leong Investment Bank Research - 14 Sep 2015