AirAsia’s 2017 net profit of RM1.64bn (+1% yoy) was above market expectations but below ours. But core net profit fell 26% yoy to RM1.23bn due to a surge in operating costs (+65% yoy). We raise our EPS by 24-27% in 2018-19E as capacity expansion was above our expectations. Asset monetisation and expanding its regional network remain key focus areas for the group. We maintain our HOLD call with a higher TP of RM4.33, based on 10x 2018E EPS.

Higher Revenue and Operating Profit

Net profit of RM1.64bn (+1% yoy) in 2017 was 7% above consensus of RM1.54bn, but 5% below our going-in estimate of RM1.72bn. We were surprised by the surge in operating costs, mainly for higher staff, fuel and maintenance. With its staff retention plan, AirAsia paid higher bonuses in 4Q17 and increased salaries of pilots and engineers. AirAsia consolidated its operations in Indonesia and the Philippines in 2017. On a proforma basis, revenue grew 14% yoy to RM9.71bn while net operating profit rose 8% yoy to RM1.59bn in 2017. But 2017 core net profit fell 26% yoy to RM1.23bn, excluding RM410m in net one-off gains.

Increased Capacity But Lower Air Fares

AirAsia added 24 aircraft (+14% yoy), increasing its group fleet size to 196 aircraft in 2017 with Malaysia (7 aircraft), Thailand (5 aircraft) and India (6 aorcraft) seeing the most additions. But the negative impact of lower average fares (-7% yoy) was offset by a higher seat-load factor, increasing 1ppt to 88%, and passengers carried (+17% yoy).

Monetisation of Assets

AirAsia completed the sale of its 50% stake in Asia Aviation Centre of Excellence (AACE) for USD100m in mid-November 2017 and sold a 38.6% stake in Ground Team Red Holdings (GTR) to SATS for SGD119.3m in January 2018. AirAsia plans to divest a partial stake in Asia Aviation Capital, the aircraft leasing arm of AirAsia, in 1Q18.

Maintain HOLD With a Higher 12-month TP of RM4.33

We raise our TP to RM4.33 from RM3.41 to reflect our higher 2018E EPS, and an unchanged 10x target PER. We maintain our HOLD call as we expect the share price to consolidate at current historic high levels. Downside risk: aggressive competition; upside risk: lower jet-fuel costs.

Source: Affin Hwang Research - 28 Feb 2018