News  Yesterday, AirAsia Bhd (AIRASIA) announced that it is divesting 25% of its equity interest in AAE Travel Pte Ltd, an Online Travel Agency (OTA) in Singapore jointly owned by AIRASIA and Expedia (50:50) for a total consideration of USD86.3m or RM306.2m based on an exchange rate of 3.55. That aside, AIRASIA also announced its preliminary operating stats for FY14.

Comments  While management has always indicated that they are looking to unlock the value of all its investments, we were surprised with the timing, as we did not expect any divestments to take place in 1H15.

 However, we are positive with the move as AIRASIA will be able realise a one-off gain of USD78.8m or RM279.6m and also improve its net gearing level from 2.07x (9M14) to 2.01x levels, while there are minimal impacts to its earnings as the contribution from this JV was not significant as it is used as a marketing platform.

 The divestment would further allow AIRASIA to tie up with other OTAs around the globe to sell its tickets allowing AIRASIA a further reach to other regions in the future.

Outlook  As for AIRASIA’s full-year performance, we are highly confident that AIRASIA will be able to meet our FY14E full-year earnings of RM517m, after reviewing its preliminary operating stats, which came in largely inline with our estimates. Its upcoming result is set to be released on 26-Feb- 2015,

 Hence, we are upbeat on AIRASIA as we continue to believe that AIRASIA will benefit greatly from the weak crude oil prices, which in turns translates to lower jet fuel costs for the group as it makes up approximately 50% of its total operating cost.

 That aside, we are also expecting its overall yields and passenger traffic to pick up due to the removal of fuel surcharges, coupled with managements’ target to achieve its ancillary income target of RM50/pax, and expect more divestments to take place in FY15.

Forecast  No changes to our FY14-15E core earnings; the earnings from this JV were not significant. However, we have tweaked our FY15E net earnings higher by 38% to RM1.0b after incorporating the gains on disposal from the above-mentioned divestments.

Rating Maintain OUTPERFORM

Valuation  We reiterate OUTPERFORM call on AIRASIA with an unchanged TP of RM3.27, based on 12.5x FY15E core PER, as we continue to believe that AIRASIA will continue to benefit from the weak crude oil prices.

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

 War, global political risk, pandemic.

Source: Kenanga