Results

• Within Expectations – Reported 3Q15 core earnings at RM158.1m and 9M15 at RM368.7m, 64.5% of HLIB’s FY15 forecast and 61.5% of consensus. We expect stronger 4Q15 from seasonally strong demand and lower jet fuel costs.

Deviations

• None.

Dividends

• None.

Highlights

• Revenue improved in 3Q15 to RM1.52bn (+14.4% QoQ: +15.1% YoY) mainly on stronger passenger traffics (RPK: +7.0%QoQ; 19.1% YoY). Yield (ASK/RPK) improved +12.1% QoQ on seasonally strong quarter and recovery from GST implementation in 2Q15.

• Management remained upbeat on yield recovery given MAS’s on-going route rationalization plans, while AirAsia has been cautiously adjusting capacity to match market demand.

• Despite MYR depreciation against US$ (See Figure #7), overall margin still improved in 3Q15 due to lower jet fuel costs (see Figure#6), which lowered unit cost operation.

• Indonesia AirAsia (IAA) remained in negative equity position post IDR4.2tn perpetual sukuk injection. Management expects further equity injections (from existing shareholders) and convertible bonds (from new shareholders) to address the negative equity issue. AirAsia has recognized RM625m losses from IAA (due to accumulated unrecognized losses) in 3Q15 after subscribing for its portion in the sukuk.

• Philippines AirAsia (PAA) remained in the red due to higher maintenance cost and lower average fares. Similar to IAA, AirAsia is expected recapitalize PAA to address the negative equity position. Both IAA and PAA are targeted for IPO exercise by 2018.

• Both IAA and PAA will undergo further fleet rationalization exercise to improve yields and profitability in 2016. Only TAA (Thailand) and MAA (Malaysia) will receive new A20s in 2016, while JAA (Japan) will also start operation in 1H16.

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

• We have fine-tuned our assumptions and FY15-17 earnings by -1.1%, +14.6% and +16.1% after adjustments for lower jet fuel cost assumptions.

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 higher Target Price of RM2.00 (From RM1.98) based on SOP, post earnings adjustments.

Source: Hong Leong Investment Bank Research - 27 Nov 2015