• HLIB maintains a BUY rating on AIRASIA with an institutional target price of RM3.85 (based on SOP, which accounted for 20% higher share base in 2017, post completion of share placement by end 2016) or 48% potential upside. AIRASIA’s share prices corrected 21.2% from a high of RM3.30 (19 Aug) to a low of RM2.51 (17 Nov) before ending at RM2.60 yesterday. Currently, AIRASIA is trading at 4.9x FY17 P/E, about 62% discount to its 10-year historical P/E of 13x.

• Strong 4Q16 and 2017 showing. Despite recent RM depreciation (vs US$), 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 further enhance AirAsia’s valuation. Overall, management guided strong load factor in 4Q16 at 93%, indicating stronger earnings in 4Q16.

• Allaying investors’ concern on RM depreciation, management guided 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).

• Pending a downtrend line breakout with key support near 200-d SMA. We expect Air Asia share price to find a floor near 200-d SMA or RM2.47 as bottoming up hourly indicators could suggest downside risks are ebbing and implying imminent technical rebound towards immediate stiff resistance at RM2.71 (downtrend line). A decisive breakout above RM2.71 will lift prices higher towards RM2.84 (100-d SMA) and our LT objective of RM3.00. Conversely, a breakdown below RM2.47 will trigger further slide towards RM2.20-2.30 zones. Cut loss at RM2.42.

Source: Hong Leong Investment Bank Research - 6 Dec 2016