- We re-affirm our BUY rating on AirAsia (AA), with an unchanged fair value of RM4.20/share following the release of 1Q12 results last night. Our sum-of-parts derived valuation continues to peg AA at FY12F earnings. 

- AirAsia reported a 1Q12 net profit of RM172mil. Excluding net forex gains of RM55mil, normalised earnings were registered at RM153mil. This made up 20% of our and 17% of consensus full-year estimates, respectively. Ex-associate losses, net operating profit of RM167mil would have accounted for 22% of our earlier FY12F earnings of RM767mil.

- 1Q12 yields increased 9% YoY largely driven by fuel surcharge, though we estimate underlying yields rose 2% YoY. Despite a cut in ancillary charges in February 2012, ancillary per pax sustained QoQ (at RM40/pax) given better take-up. 

- The group commenced recognition of Thai Airasia (TAA) earnings in 1Q12 amounting to RM2.3mil. TAA's full quarter contribution would have been RM33mil, if excluding the last chunk of accumulated losses reversal of RM28mil and RM7mil in IPO fees. TAA earnings however were offset by AA Japan (AAJ) and AA Philippines (AAP) start-up losses of a total RM11mil.

- We understand that forward load factor was up 3% YoY, suggesting sustained pax traffic growth in the coming quarter. Yield strength sustainability is a bit uncertain given potentially increased competition. SIA's short-haul arm, Silk Air, for example, is increasing capacity on regional shorthaul routes given much better demand compared to longhaul routes which have been a drag on FSCs. 

- Notwithstanding this, we raise our FY12F earnings by 5% and FY13-14F by up to 30% to factor in associate earnings contributions ' for FY12F mainly from TAA, but partly offset by start-up losses from AAJ, AAP and other associates.  2Q12 will see TAA contribution balloon given full quarter earnings recognition. Our fair value remains unchanged, however, as we already incorporate the value of AA's stake in TAA and IAA in our existing sum-of-parts valuation.

- TAA is targeted to list on the Stock Exchange of Thailand on 31 May 2012 and the IPO price has been set at THB3.70/share. The group is issuing 1.2bil shares and bookbuilding has been oversubscribed by 10 times. 

- From a valuation stand point, AA's implied valuation of 9x FY12F earnings looks undemanding vs. RyanAir's forward PE of 13x. At current price, the market seems to only factor in the value of AA's Malaysian operations. The listing of TAA will put a value to AA's post-listing 45% stake and should serve as a key re-rating catalyst.

Source: AmeSecurities