Period  1Q14

Actual vs. Expectations We consider the reported 1Q14 core earnings of RM126.7m as within expectations albeit only making up 17% and 18% of our full-year forecast and consensus due to seasonality factors where the first halves are generally weaker.

Dividends  No dividend was proposed for the current quarter, as expected.

Key Results Highlights On a YoY basis, AirAsia’s 1Q14 core earnings was down by 19% from RM155.9m to RM126.7m despite flattish revenue was mainly due to the increase in depreciation and also interest expenses which saw an increase of 7% and 12%, respectively due to the additions of aircrafts. Its yield (sen/RPK) subsequently declined by 13% from 13.1 sen to 11.3 sen as a result of the irrational price war by competitors.

 QoQ, AirAsia’s pre-tax profit was down by 43% to RM139.7m on the back of lower revenue of RM1302m (-4%) and also lower contribution from its associates of RM16.3m (-27%). The slid in revenue and associates contribution was mainly due to seasonality factor whereby the first quarter tends to be weaker than fourth quarter. However, we do see some positives in 1Q14, as there is a sign of recovery in average fares of RM135 (+4%), coupled with a lower Cost per Available Seat Kilometer (CASK) of 13.9 sen (-3%).

Outlook  Management’s goal in revenue enhancement by driving up its ancillary income to RM50/pax remains intact as they further introduce more ancillary products i.e. reintroduce its hot seat, new high flyer product “premium flex”, duty free and etc.

 At the same time, management are still highly committed on its cost reduction efforts as they aim to further reduce their cost through more automation, higher staff efficiency, and also route rationalisation on its high frequency routes to further optimise profitability. That aside, AirAsia has also increased its target to sell up to 12 of its old aircrafts instead of its initial target of 6 aircrafts due to better than expected demand from the market.

 We believe that with the recovery in yield coupled with healthy forward booking numbers due to its aggressive marketing efforts, its cost reduction initiatives would definitely be a boon to its earnings.

Change to Forecasts No changes to our earnings forecast.

Rating Maintain OUTPERFORM We continue to maintain our OUTPERFORM call on AirAsia as we believe that despite the challenging operating environment, it would still be able to maintain its growth momentum as compared to its peers, coupled with a potential capital upside of 29%.

Valuation  Our Target Price is maintained at RM3.01 based on an unchanged 11x FY14 PER.

Risks to Our Call  Sharp decline in airfares on intensified price war.

 War, global political risk, pandemic.

Source: Kenanga