AirAsia reported strong operating earnings but its bottom-line fell short on estimates, dragged down by losses at its associates and JVs. Nonetheless, we see better quarters ahead as passenger load and take-up of ancillary items gain pace. With our earnings unchanged, we maintain our BUY call on AirAsia, as well as our FV of RM4.57. The stock is now attractive at 9x FY12 PE vs its peers' 13-14x. The 1Q operating margin of 32% was one of the highest among global airlines, which are struggling amid high oil prices and weak demand.
Drag from JVs, associates but operating earnings firm. Although jet fuel price inched up 9.3% y-o-y, AirAsia still posted decent profits in 1Q, with a core earnings (including associates) of RM175m (y-o-y: -8.8% and q-o-q: -43.9%) on revenue of RM1.16bn (y-oy: +10.9%, q-o-q: -8.2%). Revenue growth was fuelled by higher RPK (+8.6% y-o-y) and yields after Firefly and MAS ceased to be its direct competitors. While the revenue was in line with estimates, there were losses from Expedia (RM8.6m), Philippine AirAsia (RM5m), Japan AirAsia (RM3m) and Indonesia AirAsia (RM6m), which led to the group's bottomline making up only 17% of our full-year forecast. However, its EBITDAR and PBT were within estimates, accounting for 20% and 24% of our full-year forecasts respectively. We see better ensuing quarters (notably volume for 2Q and 4Q, and yields for 3Q and 4Q), pushed up by a higher passenger load and take-up of ancillary items.
The takeaways from AirAsia's analyst briefing are:
- Load factor should improve owing to seasonally higher demand. We also believe that MAS (and Firefly) will continue to focus on improving yields in the passenger segment as this has proven to be the right strategy.
- The Philippine JV's load factor of 60% was expected, and it will take 7 months to boost load factor. Should its losses exceed the total allocated investment of USD10m, AirAsia may not book the losses into its accounts. We remain bullish on the outlook for Japan.
- Demand for ancillary items will pick up, with increases in cargo (+ 5-10% y-o-y), baggage (+ 31% y-o-y) and food (+30% y-o-y) following the price cut for ancillary items. - Thailand saw higher costs due to a 12% salary adjustment for pilots (one-off to compete with its full service peers), IPO expenses and branding campaigns.
- Indonesia posted losses owing to the finance costs related to the funding of 5 new aircraft to comply with regulatory requirements. The outlook remains promising while its IPO is on track for 4Q11. Sees Indonesia as the jewel of the crown in terms of international growth.
- Fleet deliveries have been brought forward due to the higher demand
- Hedged 40% of jet fuel in 2Q at USD122/bbl versus last year's average of USD131/bbl. 20%-25% for 2H at Brent USD116/bbl vs. last year average of USD110/bbl.