Highlights/ Comments

• AirAsia is benefiting from weak jet fuel price (in tandem with low crude oil price), given 40-50% of its operational cost is attributed to jet fuel. AirAsia has hedged 76% of jet fuel requirement for FY16 at US$54/bbl with the remaining 24% requirement leveraging on spot price, which is expected to trend down from current level of US$55/bbl level. The average fuel cost for AirAsia for FY16 is likely to realize at US$55/bbl (a drop of 30% yoy), lower than HLIB’s assumption of US$60/bbl and consensus US$60-80/bbl.

• RM depreciation against US$ over the past 1 year has recently stabilized at US$3.90-4.10/US$ (from peak of US$4.50/US$ in Jan 2016). We expect RM/US$ to be stable and sustained at current until year end, indicating a minor depreciation of 2-5% yoy for FY16, which is relatively immaterial as compared to the 30% drop in jet fuel price. Major components of AirAsia’s cost structure (i.e. jet fuel, maintenance, leasing, interest, etc) are denominated in US$.

• AirAsia group has recorded a strong operation numbers in 1Q16, with record high load factor of 84.8% for the group. Both MAA and TAA have been benefiting from the increasing traffic on China sector, while improved operations of IAA and PAA indicate the ongoing restructuring continues to bear fruits. AAI is also making strong in roads within India domestic market.

• Given the strong load factor, we expect AirAsia group to achieve higher yields in 1Q16, especially for MAA due to capacity cuts by MAS. MAA has been enjoying improving yields since 3Q15.

• Given the combination of 1) reported strong 1Q16 statistics; 2) expectation of yield improvements; and 3) lower jet fuel, we expect 1Q16 to report core earnings of RM250-300m (excluding contribution from IAA, PAA and AAI) vs. HLIB’s RM1bn and consensus RM813m for FY16.

Risks

• World crisis (i.e. war, terrorism and epidemic outbreak), shutdown of KLIA2, surge in jet fuel price and high speed train infrastructure between Singapore and P. Pinang.

Forecasts

• After taking into consideration of yield improvement, lower jet fuel cost and sustainable RM/US$, we have increased FY16-18 earnings by +9-18% respectively.

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; 3) Low jet fuel price; and 4) Strong ancillary income.

Negatives

• 1) Strengthened US$; and 2) Continued losses from associates IAA and PAA.

Valuation

• Uphold our BUY recommendation with higher TP of RM2.60 (from RM2.14) based on unchanged 10% discount to SOP, after adjusting for higher earnings and increased share base (post 20% increase by major shareholders).

Source: Hong Leong Investment Bank Research - 17 May 2016