Highlights

• We expect a gradual demand recovery for air travel in 2016 benefitting MAHB and AirAsia:- 1) Foreigner: Government is stepping up efforts in promoting Malaysia tourists destinations with a huge allocated budget of RM1.2bn for 2016 (vs. RM316m in 2015). Malaysia targets for 30.5m tourist arrivals (vs. 27.4m in 2014). 2) Malaysian: Gradually adjusting to the increasing cost of living and RM depreciation since 2015, increasing number of Malaysian will resume their travelling passion with adjusted budget in 2016.

• In 2016, better structured capacity addition is expected to match the gradual recovery in ai r travel demand. Post capacity rationalization exercise in 2015, MAS will be more focused in expanding its domestic and regional networks, integrating with long-hauls (code-sharing), while AirAsia is also working towards equitable supply-demand growth.

• With the drastic capacity cut in the system (by MAS) in 2015 and reasonable planned supply-demand structure in 2016, we expect continued yields improvement in 2016, benefitting airlines (i.e. – AirAsia, AirAsia X and MAS).

• Jet fuel price has slumped further in 2015 to US$45/bbl and expected to stay low in 2016. The low jet fuel price will improve ai rlines profitability. AirAsia is expected to be the major beneficiary (jet fuel contributed 40-60% to airlines cost structure) of low oil price environment. AirAsia only hedged 41% of 2016 jet fuel requirement at US$63/bbl.

• The depreciation of RM impact:- 1) MAHB: Positive impact from the higher translated earnings contribution of wholly owned ISGA in EU€. 2) AirAsia: Negative impact from higher translated cost structure (jet fuel, maintenance and debts) denominated in US$ (+18% YTD). However, the negative impact only partially offset the benefits from the slump in jet fuel costs (-35% YTD).

Risks

• World crisis (i.e. war, tourism and epidemic outbreak), delay in KLIA2 completion, high jet fuel price and the development of high speed train between Singapore and Pulau Pinang.

Forecasts

• Unchanged.

Rating

• OVERWEIGHT

Positives

• Low Jet fuel price.
• Liberalization of ASEAN open sky policy.
• Increased government budget to RM1.2bn for tourism.

Negatives

• Ringgit depreciated against US$.
• Negatives consumer sentiments – Air Incidents and GST.

Valuation

• Maintained BUY on MAHB with unchanged target price of RM6.30 based on DCFE.
• Maintained BUY on AirAsia with unchanged target price of RM2.00 based on SOP.

Source: Hong Leong Investment Bank Research - 6 Jan 2016