Highlights / Comments

• The ongoing low jet fuel price (in tandem with low crude oil price) with stable forex (RM/US$) continued to work towards AirAsia’s benefit, given 40-50% of its operational cost is attributed to jet fuel. AirAsia has hedged 74% of jet fuel requirement for 2Q-4Q16 at US$55/bbl and 40% of requirement for FY17 at US$58/bbl. We expect jet fuel price to range bound at US$55-60/bbl (while forex at RM4.00-4.10/US$) in 2H16, indicating AirAsia’s average jet fuel cost at US$56/bbl in FY16, lower than HLIB’s assumption of US$60/bbl and consensus US$60-70/bbl. The net benefit of 30% yoy drop in jet fuel cost in FY16 is more than offset the impact of 2-5% yoy depreciation of RM/US$.

• AirAsia group continued to record strong operation numbers in 2Q16, with new record high load factor of 85.1% for the group. 3 additional aircrafts were deployed into MAA and TAA in 2Q16, given the strong demand growth (especially on China sector). IAA and PAA continued to report strong load factors at 82.4% and 90.0% respectively in 2Q16, indicate the fruitation of ongoing restructuring. AAI also reported strong load factor of 87.8% in 2Q16.

• Given the strong load factor, we expect AirAsia group to continue charting yield growth in 2Q16 (yoy).

• Asia Aviation Capital (AAC) was set up to back in 2015 to monetize its aircraft leasing business potentials. The divestment of AAC will benefit shareholders: 1) improve balance sheet; 2) improve cash flow; 3) higher dividends; 4) lower receivable risks; 5) expand business portfolio; and 6) greater flexibility of fleet expansion.

• Given the combination of 1) reported strong 2Q16 statistics; 2) expectation of yield improvements; and 3) low jet fuel, we expect AirAsia to report core earnings of RM350-400m in 2Q16 (excluding contribution from IAA, PAA and AAI) and RM850-900m in 1H16 vs. HLIB’s RM1.8bn and consensus RM1.2bn for FY16 (potentially earnings revision).

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

• Unchanged.

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 unchanged TP of RM3.85 based on unchanged 10% discount to SOP. We have taken into account of the additional 20% share base from upcoming completion of private placement exercise by major shareholders (October), which will improve local ownerships to 57.5% (i.e. foreign shareholdings at 42.5%).

Source: Hong Leong Investment Bank Research - 10 Aug 2016