AirAsia’s 2Q17 results registered higher revenue (+19.2% yoy) but lower core net profit (-60.8% yoy). Despite higher passenger movement and higher capacity, bottom-line fell due to higher operating costs, particularly staff costs, aircraft fuel expenses and user charges. 1H17’s core net profit fell by 28.2% yoy to RM440.5m, constituting 34% of our and consensus estimates. Overall results were below expectations, prompting us to lower our 2017-19E EPS estimates by 24%-29%. Downgrade to HOLD with a lower TP of RM3.41 based on an unchanged 10x FY18 EPS.

2Q17: Revenue Up 19.2% Yoy, Core Net Profit Down 60.8% Yoy

AirAsia’s revenue rose 19.2% yoy to RM2.4bn in 2Q17, on the back of higher passenger demand due to aggressive promotions to boost market share. Average base fares increased by 11% yoy (2Q16: RM160 vs. 2Q17: RM177), which led to a 11% yoy growth in RASK. Operational costs saw an overall increase of 15.6% yoy despite a mere increase of 8% in ASK growth. Key culprits include staff costs that rose 22% yoy on a revision to pilots and cabin crews’ salaries, while fuel expenses also ballooned 31% yoy on the higher fuel price.

Listing Updates and Monetization of Non-core Assets

AirAsia is selling its shareholding in Asia Aviation Centre of Excellence (AACE) for approximately RM429.3m. The disposal is expected to be completed by end of Nov 2017 and the proceeds will be paid out as special dividend. The Group is also disposing part of PT Indonesia AirAsia (IAA) and converting them into new shares in PT Rimau Multi Putra Pratama Tbk, which is principally involved in the transportation, warehouse and trading businesses. The completion of the transaction will provide IAA with direct access to the financial capital markets for future fund raising opportunities. This note marks a transfer of coverage.

Downgrade to HOLD With Lower Target Price of RM3.41

We revised our earnings forecast downward amidst heightened competition and rising costs. We cut our earnings by 24%/24%/29% for 2017E/18E/19E. Downgrade to HOLD. Our target price of RM3.41 is based on an unchanged 10x FY18E EPS. Key risks: aggressive fare cuts from heightened competition, stronger dollar and higher fuel costs.

Source: Affin Hwang Research - 30 Aug 2017