We are reiterating NEUTRAL on the Aviation Sector as we believe that passenger traffic will grow at a more moderate pace. The global landscape is volatile given heightened geopolitical risks arising from the Middle East and Hong Kong, coupled with the slowdown in China. This would hamper recovery in passenger traffic volume that may not bode well for AIRPORT (UP; TP: RM6.77). On the flip side, we are expecting a strong set of 4Q14 earnings in the upcoming Feb-15 results season for AIRASIA (OP; TP: RM3.27), which is underpinned by a seasonally strong quarter coupled with better earnings prospects on lower jet fuel cost despite the recent tragedy on AirAsia Indonesia.

Satisfactory performance. For 9MCY14, the results for the aviation stocks under coverage (AIRASIA, AIRPORT) came in well within expectations. QoQ, AIRPORT’s 3Q14 core earnings dropped by 70% to RM4.4m due to 48% increase in financing costs arising from KLIA2. AIRASIA’s 3Q14 core earnings surged by 287% due to better Revenue Per Available Seat Kilometre (RASK) driven by the improvement in average fare, ancillary income, coupled with declines in its Cost Per Available Seat Kilometre (CASK) due to lower fuel costs.

YTD share price performance. As of our cut-off date on 19th Dec 2014, AIRASIA’s share price had performed relatively well with a +29% YTD return due to the positive sentiment attributable to weakening jet fuel prices. Meanwhile, AIRPORT was down by 25% YTD as the stock had been on a downtrend since the opening of KLIA2, which has been a drag on its earnings performance due to higher-than-expected financing and depreciation costs, coupled with the negative sentiment on the rights issuance exercise undertaken by management to raise up to RM1.3b for the acquisition of the remaining 40% stake in Sabiha Gocken International Airport.

Passenger traffic growing at a slower pace. Year-to-date from Jan-Nov, AIRPORT’s passenger traffic growth moderated at 5.2%, YoY, handling c.75.1m passenger traffic as compared to a double-digit growth of 15.3% YoY for the same period last year. The moderation in growth was within expectations due to the recent incidents like MH370 and MH17 that had cast a negative impact on the overall travel sentiment. However, we believe that AIRPORT would need to bank on an exceptionally strong December travelling month to meet our growth expectations of 6% for FY14. Currently, both its international and domestic segments are registering year-to-date (Jan-Nov) growth of 5.0% and 5.4% YoY, respectively.

One of the few shining stars in times of faltering fuel prices. The operating environment for the aviation industry has been highly challenging for the whole of 2014 due to: (i) compressed yield arising from stiff competitions in the region, (ii) MH370 and MH17 incident, and (iii) geopolitical unrest across the region that has greatly affected airlines’ yield and passenger traffic. However, the recent sharp plunge in global oil prices which lead to lower jet fuel cost, is the only saving grace for the airlines, especially low-cost carriers like AIRASIA, as it makes up a major proportion (>50%) of its operating cost. To recap, the average jet fuel price in 4QCY14 (up to 10th Dec 2014) has seen a sharp decline of 17% to USD96.2/bbl from USD116.2/bbl as compared to 3QCY14. Based on our sensitivity analysis, USD1.0/bbl drop in jet fuel price pegged to our in-house USDMYR exchange forecast of RM3.43 for FY15, could translate to an additional RM10.5m to AIRASIA’s bottom line assuming yield remains constant.

NEUTRAL maintained. We are still reiterating our NEUTRAL recommendation on the sector with: (i) an unchanged call but higher TP on AIRASIA (OP; TP: RM3.27) following our earnings revision due to lower jet fuel prices (Kindly refer overleaf for earnings revision) (ii) AIRPORT (UP; TP: RM6.77) as we believe that passenger traffic to continue growing at a moderate pace compared to previous years given heightened geopolitical risks, especially in the Middle East and Hong Kong, coupled with the slowdown in China and the recent three air travel tragedy in Malaysia.

Source: Kenanga