Period  4Q13 / FY13

Actual vs. Expectations AirAsia Bhd (AIRASIA)’s FY13 core earnings of RM709m came in below our expectations but within street’s consensus. Its core earnings of RM709.5m only make up 80% of our full-year estimates of RM881.6m.

 The main deviation from our expectations was due to our overly aggressively assumptions on RASK assumptions of 17.7sen vs its full-year actual RASK of 16.4sen.

Dividends  No dividend was declared yet. However, we are still expecting a net dividend of 5sen (2%, yield) to be announced later as it is still subject to shareholders’ approval.

Key Results Highlights

FY13 vs FY12 AirAsia’s core earnings declined by 16% to RM709.5m even though its revenue improved by 4%. The main drags on earnings are mainly due to higher depreciation costs and financing cost which saw an increase of 16% and 23%, respectively.

4Q13 vs 4Q12

 YoY, revenue decreased by 4% from RM1408.4m to RM1354.0m despite a 14% growth in passengers primarily due to yield pressure as a result of the irrational price war with MAS. Subsequently, its average fare was

down by 26% to RM130 per passenger, as AirAsia countered MAS’ irrational ticket pricing. Although AirAsia managed to bring its CASK –Ex-Fuel down by 10%, it was not sufficient to cushion the impact from yield pressure as its RASK decreased by 13% to 16.6 sen. Hence, its core earnings also saw a sharp decrease of 44% from RM380.5m to RM213.2m.

4Q13 vs 3Q13

 QoQ, core earnings improved 8% to RM213.2m underpinned by 6% growth in revenue. The growth in revenue was supported by a strong set of operating numbers whereby AirAsia achieved a record load factor of 85% on the back of 4% increase in capacity.

Outlook  Management has reiterated their focus in 2014 would be to further drive cost down by: (i) increasing the use of automation, (ii) reduce marketing spending, (iii) renegotiation of engineering contracts, (iv) route rationalisation, (v) closure of regional offices, and (vi) disposing old aircraft in order to be more competitive in the market.

Outlook  Apart from cost saving initiatives, management will also strive to strike a balance by enhancing its revenue through its “Emirates Project” by introducing more connecting flights with AAX and other AOCS, growing its ancillary income per pax from RM41 to RM50 by introducing Wifi and Duty Free Shopping on plane.

 We concur with management’s view that 2014 would be a better year as compared to 2013, with the expectation that yield would recover and its cost savings initiatives would boost earnings.

Change to Forecasts  We reduced our FY14 earnings estimates by 14% as we adjusted for lower yield assumptions.

Rating Maintain OUTPERFORM

 We are keeping our OP call on AirAsia given its resilient earnings amid tough operating environments (i.e. price war, fuel price risk, currency risk) and also its dividend policy that payouts 20% of its net operating profit.

Valuation  Following our downgrades in earnings, our TP is also reduced from RM3.51 to RM3.01 based on an unchanged 11x FY14 PER.

Risks to Our Call  Global political risk

 Pandemic

 War

Source: Kenanga