AirAsia posted an FY12 core net profit of RM803m on  revenue of RM4.99bn, in line with our and consensus estimates. The numbers were weaker y-o-y owing to higher costs  as  well  as  start-up  losses  from  its  associates.  4Q  yields  did  not  pick  up  as much as we had anticipated but this was compensated by higher ancillary revenue. We keep our BUY call on AirAsia, with an unchanged RM3.39 FV, based on 11x FY13 earnings.  We  see  a  strong  comeback  in  investor  interest  after  management announced a bumper dividend and a payout policy. This may translate into a yield of 9% in FY12, if the board approves the proposals.  

Weaker  year  on  rising  costs. AirAsia reported a FY12 core net profit of RM803m  (-26% y-o-y; Q4: +111% q-o-q, +39% y-o-y) on the back of RM4.99bn in revenue, both of which were  in  line  with  our  and  consensus  estimates.  Despite  revenue  jumping  11%  y-o-y, full-year  earnings  were  weaker  by  26%  y-o-y  owing  to  higher costs, notably  those  relating to staff, maintenance and fuel, which rose 20%, 35% and 11% y-o-y respectively. In addition, start-up losses totaling RM47.2m from AirAsia Japan, AirAsia Inc (Philippines) and AirAsia Expedia dragged down overall profitability. 
 
Yields  not  picking  up  as  anticipated.  AirAsia  saw  its  overall  yields  (revenue  /  RPK)  in 4QFY12  inching up  by  2%  y-o-y  against our  earlier  expectation  for  4%-5%  y-o-y.  For  the full  year,  its  yields  picked  up  by  4%.  FY12's ancillary  revenue  was  higher  by  28%  y-o-y owing  to  higher  luggage  charges  (up  by  8.3%  y-o-y  on  a  per  pax  basis),  suggesting  that the upside to airfares was less than 1.8% y-o-y. With Malindo due to launch its operations sometime  in  March  after  having  received  its  air operator's certificate (AOC)  recently,  we see  some  pressure  on  AirAsia's  yields,  although  the  downside  would  not  be  too  painful given  Malindo's  small  scale  of  operation.  As  for  FY13,  we  are  conservatively  estimating overall  yields  to come  in  flat  as  the drop  in  yields from  airfares  would  be  offset  by  higher ancillary  revenue  given  that  management  is  looking  at  introducing  duty-free  shopping  on board,  along  with  the  provision  of  wifi  and  online  content  sometime  in  the  middle  of  the year.

Fleet growth to defend home turf. The expansion of its fleet by 10 aircraft as announced earlier is maintained. The additional capacity will focus on domestic routes, increasing the frequencies of some routes in an attempt to stave off competition from Malindo.

Indian JV. If approved, the Indian JV could commence operations as early as 4Q. Its setup will  be  similar  to  the  Indonesia  AirAsia  (IAA)  model,  relying  on  both  online  booking  and distribution points. While  India  has  a much  more  favourable  population  demographics,  its high fuel tax could make it a challenging place to operate in. We give AirAsia  the merit of succeeding in India due to its tight cost discipline. The Indian JV will hub in  Chennai and ride on the existing network of both Malaysia and Thai AirAsia.

Dividends  galore.  Subject  to  capex  and  cash  needs,  AirAsia  is  introducing  an  annual dividend policy with a payout of 20% of its net operating profit. It had announced a bumper FY12 dividend totaling 24sen (18sen interim + 6 sen final which have yet to be approved), translating to a yield of 9%. As these would amount to RM660m, it suggests a total payout of 60% of its operating profit. Despite the surprise payout for FY12, we have not projected any  potential  dividend  for  FY13/14  as  we  prefer  to  be  cautious on the company's outlook
for this year in view of the entry of Malindo.

Maintain BUY. We maintain our BUY call on AirAsia and our RM3.39 FV, premised on 11x FY13  EPS.  We  leave  our  earnings  estimates  unchanged  for  now  until  we  get  a  clearer picture  on  Malindo's promotion offerings. The stock is currently trading at an 8.6x FY13 PE,  representing  a  27%  discount  to  its  peer  average  multiple.  Taking  into  account  the market caps of Asia Aviation and its insurance arm, AirAsia is trading at a cheap 7.3x PE versus its historical and peer averages of 10x and 12x respectively. Elsewhere, we expect the group's upcoming IPOs (AirAsia X and IAA) to crystallize its valuations. That being said, we feel that in view of the budget carrier's strong network and fleet as well  as  low cost  structure,  investor  concerns  over  the  potential  threat  from  new  entrant  Malindo pressuring AirAsia's yields and market share may have been exaggerated.

Source: OSK