Results

• Within Expectations – Reported 3Q16 core earnings of RM409.1m and 9M16 of RM1.2bn, achieving 69.7% of HLIB’s FY16 forecast, but above consensus at 89.9%. We deem the results to be in line, on seasonally stronger 4Q.

Deviations

• None.

Dividends

• None.

Highlights

• YoY: Revenue jumped by 11.3% to RM1.7bn on stronger pax traffics, higher ancillary income and new maintenance fee charged to JVs/Associates. Subsequently core earnings increased by 239.8% on higher revenue and lower average jet fuel price as well as higher contribution from JVs/Associates (excl. IAA, PAA, AAI and JAA).

• QoQ: Core earnings improved by 32.0% on higher pax traffic, yields and contributions from JV/Associates.

• YTD: 9M16 core earnings grew by 272.8% yoy, on higher revenue, low jet fuel costs and stronger JV/Associates contributions (excl. IAA, PAA, AAI and JAA).

• Asset Monetization: Unlock the value for AAC

(US$1bn/RM4.4bn based on offer bid) , AACOE (RM200m based on 10x P/E) and Expedia (US$86m/RM380m based on disposal exercise back in 2015) in 2017 through divestments. The proceeds will be used for debt repayment (improve net gearing) and dividend payout .

• IPO Exercises: Turnaround of IAA and PAA expected in 4Q16 , follows by IPO exercises by early 2017 , which will enhance investors’ confidence in AirAsia, given improved earnings and cashflow. AirAsia is also exploring dual listing into Hong Kong Exchange (for value unlocking).

• Outlook: Guided strong load factor in 4Q16 at 93%, indicating stronger earnings in 4Q16 . Allaying investors’ concern on RM depreciation, management guided the

stronger earnings in 2017 from capacity expansion (additional 21 A320s), higher ancillary income, strong load factors and low jet fuel costs (hedged 74% of requirement at US$60/bbl in 2017), would more than offset the impact from RM depreciation (Management guided sensitivity of RM20m to earnings for every 10sen change in RM/USD).

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 ↔

• Despite the concern of RM depreciation, AirAsia is expected to remain on growth trajectory from the strong capacity expansion, high load factors and low jet fuel costs. Asset monetization and JV/Associates IPO exercises in 2017 will enhance AirAsia’s valuation.

Valuation

• Uphold BUY recommendation with unchanged TP: RM3.85 based on SOP (accounted for 20% higher share base in 2017, post completion of share placement by end 2016).

Source: Hong Leong Investment Bank Research - 25 Nov 2016