Period  3Q14/9M14

Actual vs. Expectations 9M14 core earnings of RM252.2m only accounts for 49% and 51% of our and consensus full-year estimate. However, we deem the results as broadly inline given that the fourth quarter are always the strongest quarter due to seasonality factors and coupled with the fact that it is set to benefit from lower jet fuel cost that had been on the down trend since 1H14. Typically, 4Qs contribute 50% of full year earnings.

Dividends  No dividend was declared, as expected

Key Results Highlights YoY, 9M14 core earnings declined by 49% to RM252.2m despite a marginal revenue growth of 3%. The decline in earnings was mainly attributable to 4% decline in its RASK of 15.7 sen as a result of weaker average fare of RM133.5/pax (-6%). Its CASK remains flat at 13.8 sen despite a 7% increase in its ASK of 25.0b due to a 7% increase on its total operating costs that was driven by fuel, staff, maintenance, overhaul and user fees that saw an increase of 5%.

 QoQ, 3Q14 core earnings surged by 287% to RM99.8m due to better RASK of 15.5 sen (+1%) driven by the improvement in average fare of RM137.2/pax (+7%) and ancillary income of RM44.3/pax coupled with the decline in its CASK of 13.4 sen (-5%) due to lower fuel costs of RM521.1m (-10%).

Outlook  While the overall operating environment in the sector remains highly challenging, the current slump in fuel prices would further help lift its earnings as it makes up approximately 50% of its total operating cost. Coupled with a strong seasonal quarter ahead, we believe AIRASIA would be able to register strong earnings equivalent of its 9M14 performance.

 That aside, management is on track to achieve its ancillary income target of RM50/pax through the introduction of duty free, on-board wifi, and premium flex.

Change to Forecasts No changes to our earnings estimate.

Rating Upgrade to OUTPERFORM We are upgrading AIRASIA to OUTPERFORM from MARKET PERFORM as we believe that AIRASIA would continue to benefit from the recent decline in oil prices coupled with the further improvements in average airfares.

Valuation  Higher TP of RM2.80 (from RM2.47) based on higher Fwd PER of 12.5x on unchanged FY15E EPS. The newly applied PER is pegged at AIRASIA 5-year historical average, which is a notch up from our previous valuation basis of 11.0x which was close to - 0.5SD levels. We observed that AIRASIA’s PER rose by one standard deviation during the sharp fall in oil prices back in June 2012. To catch the sentiment of this downtrend in fuel costs, we rather raise our PER pending confirmation on how low fuel cost will be in the next 6-12 months.

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

 War, global political risk, pandemic.

Source: Kenanga