Still on Safe Cruising Speed

AirAsia reported its maiden consolidated income statement after combining the financials of the Malaysia, Indonesia and Philippines operations. The consolidation has resulted in lumpy non-cash gains totalling RM341.7m. Stripping exceptional items off, AirAsia’s operating profit fell 16% yoy largely due to spread compression on higher staff costs and fuel expenses, as well as the weakening of the Ringgit. Overall results were in line with expectations, as we expect progressively firmer quarters ahead. We believe the recent share price correction provides a good buying opportunity. Maintain BUY.

Market Share Expansion But Lower Fares

AirAsia’s revenue rose 8% yoy to RM2.2bn on the back of higher passenger demand due to aggressive promotions to boost market share. As a result, the average base fare was down but this was compensated by higher ancillary income, which led to a 3% yoy RASK appreciation. Despite minimal ASK growth, AirAsia’s Malaysia market share climbed 3ppts to 61% in 1Q primarily due to fare-slashing to boost loads.

Margin Squeeze on Higher Staff Costs and Fuel Expenses

AirAsia’s 1Q core net profit rose 36% yoy largely due to the lower tax payable, as the effective tax rate fell 13ppts yoy. Operational costs, in general, saw an overall increase despite minimal ASK growth, which led to the 16% decline in operating profit. Key culprits include staff costs that rose 27% yoy on a revision to pilot salaries, while fuel expenses also ballooned 25% yoy on the higher fuel price and weaker Ringgit.

Sale of Leasing Arm Still on Track

We understand that the sale of its leasing arm remains on track, with two potential bidders being evaluated. Meanwhile, the IPO of its associates in Indonesia and Philippines remain ongoing, although it could be delayed to 2018. In a surprise move, management guided for special dividends every two years as it continues to monetise its private equity businesses.

Monetisation Potential

We expect yield compression to be a recurring theme in 2017, with competitors’ aggressive expansion squeezing margins. Despite the projected core EPS decline of 18% in FY17, AirAsia’s valuations remain undemanding with huge monetisation potential, in our view. We maintain our BUY rating and 12M TP of RM3.80, pegged to a 10x CY17E EPS. Key risks: aggressive fare cuts by the competition and higher fuel costs.

Source: Affin Hwang Research - 26 May 2017