The 1H12 core net profit of RM300m (excluding net exceptional gains of RM1.13b) accounted for only 35% of ours and 33% of the consensus' FY12 earnings estimates. Nonetheless, we deemed the result to be in line as we expect a stronger 2H12 earnings.

Dividends  No dividend was declared during the quarter.

 QoQ, the core net profit was lower by 16% to RM137m due to a 3% drop in yield/RPK. The lower yield was attributed to lower contribution from its ancillary income (-54%) and higher (+2%) operating cost. The load factor was flat at 80% due to the seasonally weak quarter. The lower ancillary income was mainly due to the downward revision on baggage pricing which took place in February 2012. However, the management has revised up the baggage charges in July 2012.   

 YoY, the revenue grew by 10% although the core net profit saw a decline of 15%. The lower core net profit was mainly due to the absence of airline incentives (c. RM22m per quarter), which is currently still being in negotiation with Malaysia Airports Holding Berhad (MAHB).   

 Its associates in Japan and Philippine are still in loss positions due to their initial start-up costs. Since its first operation, Japan AirAsia has recorded an 80% load and we expect it to turn profitable in the near term.        

Outlook   Expect earnings momentum to rebound in 2H12.

 The airline incentive could be halved from the current level (at c. RM10m per quarter vs. RM22m) due to the rollover to a higher base year of traffic to 2011 instead of 2008. This will lead to reduction in incentives receivable from MAHB.

 We have revised our FY12-13 earnings lower by 4% and 7% as we imputed in a lower ancillary income from RM45 to RM43 per pax and lower incentives from MAHB.

Rating  Maintain OUTPERFORM

 Maintain OUTPERFORM with a potential capital upside of 14% from the current price.

Valuation    We are keeping our target price unchanged at RM4.06 based on 12x PER of FY13 earnings (previously at 13x FY12).

Risks   Average jet fuel price above USD130/barrel.

Source: Kenanga