Results

• Within Expectations – Reported 2Q16 core earnings at RM299.9m and 1H16 at RM796.5m, achieving 45.0% of HLIB’s FY16 forecast, but above consensus at 66.4%. We expect stronger 2H16 on seasonality peak travel demand.

Deviations

• None.

Dividends

• None.

Highlights

• YoY: 2Q16 revenue jumped by 22.5% to RM1.6bn on stronger pax traffics, higher ancillary income and new maintenance fee charges to JVs/Associates. Subsequently core earnings increased by 243.9% on higher revenue and lower average jet fuel price at U$59/bbl in 2Q16 vs. US$85/bbl in 2Q15 as well as higher contribution from JVs/Associates (exclude IAA and PAA).

• QoQ: 2Q16 revenue slide by 4.5% on lower average yields and ancillary income (due to seasonality weaker demand) and combined with weaker JV/Associates contribution, core earnings dropped by 39.6% to RM299.9m.

• YTD: Similar to quarterly result, 1H16 core earnings grew by 278.2% yoy, on higher revenue, low jet fuel costs and stronger JV/Associates contribution (exclude IAA and PAA).

• Comment: AAC earned US$18.8m (RM75.2m) in 2Q16 based on a fleet of 55 A320s. AAC currently has a debt of RM2.0bn and expected to accumulate up to RM7.0bn, when AAC take over another 66 A320s. The divestment of AAC will improve AirAsia balance sheet and cash flow significantly. The upcoming RM1bn private placement (by Oct) will also improve net gearing of AirAsia.

• Outlook: Guided strong load factor at 83-92% for the group in 3Q16 (expect to continue in 4Q16), indicating continued strong earnings outlook for seasonally peak demand in 2H16. Management is upbeat on the turnaround of IAA (Indonesia) and PAA (Philippines) in 2H16 due to improved load factors and further reduction in costs structures (focus on international routes for IAA and fleet rationalization for PAA). AAI will focus on increasing routes and fleets to 20 to operate on international flights by 2018.

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 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 unchanged TP: RM3.85 based on SOP.

Source: Hong Leong Investment Bank Research - 30 Aug 2016