Results

• Within Expectations – Reported 3Q17 core earnings of RM466.5m, bringing 9M17 earnings to RM1.1bn, which was 73.3% of HLIB FY17 forecast and 86.5% of consensus. We do not discount the possibility of another strong 4Q17 earnings to push full year earnings above our forecasts.

Deviations

• None.

Dividends

• None.

Highlights

• YoY: Core earnings rose by 62.1% on the back of higher revenue (driven by higher passenger traffic) with sustained margins and higher net associate contributions (absence of loss recognition from AAI in 3Q17).

• QoQ: Core earnings improved by 26.1% mainly on higher traffic with improved margins (due to lower staff cost and fuel cost) and higher net associate contributions.

• YTD: Core earnings increased by 11.9%, in line with the 13.9% growth in revenue (on higher passenger traffic).

• Outlook: Capacity growth for 2018 is guided at c.17.4% YoY, with net addition of 36 aircrafts (90% under sales and leaseback). Management is not overly concerned on price competition from the huge capacity addition, as AirAsia continues to outstrip competitors with its competitively lowest cost structure, which will be able to offset the potentially lower fares.

• AirAsia has hedged 16% of 1H18 jet fuel requirements at US$62/bbl. Management expects jet fuel price to be capped at US$75/bbl and hence, has not hedged extensively. Higher jet fuel price will be offset by RM appreciation and improving operational efficiency.

• IAA (Indonesia) is on track for listing through RTO exercise by end 2017. The indicative valuation for IAA is RM1.44bn (based on IDR2.6tn/57.25%). PAA (Philippines) is expected to be listed in 2018, with US$250m to be raised. Post the listing exercises, both IAA and PAA are expected to be cash-flow positive to self-finance its capacity expansion.

• AAC divestment is targeted to conclude by end 2017, after being delayed as new bidders emerged. AAC is valued at US$1-1.2bn (RM4.1-4.9bn), which cash proceeds will be utilized to pare down debts and payout dividend.

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 2018, which will further enhance AirAsia’s valuation.

Valuation

• Uphold BUY recommendation with unchanged TP of RM4.10 based on SOP.

Source: Hong Leong Investment Bank Research - 30 Nov 2017