Results

• Within Expectations – Reported 2Q17 core earnings of RM315.7m, bringing 1H17 earnings to RM667.6m, which was 43.2% of HLIB FY17 forecast and 51.7% of consensus. We deem the result in line as we expect stronger earnings in 2H17 due to seasonality stronger demand factor.

Deviations

• None.

Dividends

• Declared interim dividend of 12sen/share for the first time in history. Further special dividend payment can be expected for FY17 post monetization of AACOE for US$100m (RM430m) as well as other assets (AAC & Expedia).

Highlights

• YoY: Core earnings rose by 20.5% on the back of higher revenue (driven by higher passenger traffic and yields) and margins (improved load factor and lower maintenance cost), despite the weaker contribution from JV/Associates (TAA was affected by the weaker Chinese demand and on-going mourning period for the late Thai King).

• QoQ: Core earnings improved by 24.2% mainly on higher traffic and lower maintenance cost.

• YTD: Core earnings dropped by 8.0%, dragged by weaker contribution from JV/Associates (-62.5%), especially on TAA (affected by the mourning period for the late Thai King).

• Outlook: Guided for continued strong load factor for the group in 2H17 based on current forward booking. Yield is expected to sustain into 2H17 in view of strong demand for air travel (including recovery for TAA by end 4Q17). AirAsia has also increased fuel hedging to 82% of 2H17 requirement at US$60/bbl.

• AirAsia will undergo internal reorganization exercise (see Figure #9), in order to streamline the group structure and achieve a leaner corporate structure for better supervision and facilitate corporate exercises (merger, acquisition and disposal). Expect to complete by 1Q18.

• AirAsia also announced the listing of IAA (Indonesia) by 4Q17 through RTO (Reverse Take Over) exercise. AirAsia is expected to record a gain of RM230.4m from the listing. The indicative valuation for IAA is RM1.44bn (based on IDR2,601bn / 57.25%). PAA is expected to be listed in 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 ↔

• AirAsia is expected to remain on growth trajectory from the strong capacity expansion, high load factors and low jet fuel costs. Near term catalysts include asset monetization exercises and listing of JV/Associates in 2H17 and 2018 will further enhance AirAsia’s valuation.

Valuation

• Uphold BUY recommendation with higher TP of RM4.10 (from RM3.82) based on SOP, post adjustment on the valuations for IAA and AACOE.

Source: Hong Leong Investment Bank Research - 30 Aug 2017