Results

• Above Expectations – Reported 1Q16 core earnings at RM496.6m, which had achieved 51.1% of HLIB’s FY16 forecast and 61.1% of consensus.

Deviations

• Stronger than expected passenger yields and load factors, lower cost structures and higher contribution of TAA.

Dividends

• None.

Highlights

• 1Q16 revenue jumped 31.0% yoy to RM1.7bn on stronger pax traffics (RPK: +26.2% yoy), overall yield improvements (1.4% yoy), higher ancillary income/pax (+11.1% yoy) as well as new revenue recognition of maintenance fee charges to JVs/Associates. We expect the strong revenue to continue due to controlled new capacity deployment by MAS and AirAsia in 2016, resulting in sustainable yields, while supported by new ancillary income initiatives.

• Margins improved significantly in 1Q16 mainly due to lower jet fuel costs at US$56/bbl (vs. US$75/bbl in 4Q15 and US$85/bbl in 1Q15). AirAsia has hedged 76% of jet fuel requirement for the remaining FY16 at US$54/bbl and 25% of 1H17 at US $58/bbl. Hence, AirAsia’s strong margins is expected to be sustainable.

• TAA (Thailand) also cont ributed strongly at RM94.9m in 1Q16 (+225.8% yoy; +226.1% qoq) on the back of strong demand on China sector as well as low jet fuel costs.

• Outlook on the turnaround of IAA (Indonesia) and PAA (Philippines) seemed promising, after both registered lower operating losses of RM34.6m (-52.8% yoy) and RM32.6m (-54.6% yoy) respectively. The ongoing restructuring effort of IAA (capacity cut & focus on profitable routes) and PAA (fleet restructuring & focus on North Asia sector) continue to improve the load factors, yields and cost structures. The capital restructuring of both entities (new fund injections from other shareholders) are expected to complete by 3Q16.

• JAA (Japan) is expected to commence operation by Oct 2016 with 2 A320s. AAI (India) continued to improve with lower operating losses (-55.6% yoy) as it expanded further.

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

• Increased earnings for FY16-18 by 81.9%, 49.3% and 41.7% after adjusting for stronger yields and load factors.

Rating

BUY

Positives

• 1) Beneficiary of strong ai r 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) Strengthening of US$; and 2) Continued losses from associates IAA and PAA.

Valuation

• Uphold BUY recommendation with higher TP: RM3.85 (from RM2.60) based on SOP, post earnings adjustments.

Source: Hong Leong Investment Bank Research - 27 May 2016