Period  4Q14/FY14

Actual vs. Expectations  FY14 core earnings of RM355m missed our and streets’ full-year estimate by 31% and 28%, respectively. The let down in earnings was mainly driven by higher operational costs i.e. staff cost, maintenance costs. In terms of yield, it registered a yield of 11.1sen/RPK vs. our assumptions of 12.0sen/RPK.

Dividends  No dividend was proposed for the year yet. However, we do expect management to declare dividends upon finalisation of its accounts. We are expecting a net dividend of 2.0 sen, implying net dividend yield of 0.7%.

Key Results Highlights  YoY, FY14 core earnings decreased by 39% to RM355m, despite revenue growth of 6% driven by the increase in operating cost due to staff bonus accrued in December, which further compressed its EBIT margins to 14% (-3ppt), coupled with higher net interest expenses (+30%) and the decline in associate and JCE contributions (-31%). On a positive note, its ancillary income has seen further improvements from RM40.4/pax to RM43.2/pax (+7%).

 QoQ, its 4Q14 core earnings were flattish at only RM101m (+1%), despite an impressive revenue growth of 12% largely due to the reasons above i.e. surge in net interest expenses (+19%) and sharp decline in associate and JCE contributions (-50%). Its fuel cost shot up by 19% as its average fuel cost remains relatively high at USD120/barrel vis-à-vis USD117/barrel in 3Q14 due to fuel hedging losses, coupled with the increase in frequencies to cater for the holiday seasons.

Outlook  Moving forward, we believe that 2015 would be an “interesting” year for AIRASIA, premised on: (i) potential improvement in yields due to route rationalisation/frequency management undertaken by peers, and (ii) benefit from low jet fuel costs which has been stabilising at the range of USD70/barrel.

 That aside, management is highly committed to achieve its ancillary income target of RM50/pax, and expect more divestments to take place on an on-going basis. (refer overleaf for more details)

Change to Forecasts  We slashed our FY15E earnings by 11% as we revisit our yield and cost assumptions. We lowered our yield assumptions by 7.5% to 11.1sen/RPK to better reflect the current market condition, while interest cost higher by 6.8%.

Rating Downgrade to MARKET PERFORM

Valuation  Following the major let down in earnings and high foreign shareholding (60.8% as of 26-Feb-15), we are downgrading the stock to MARKET PERFORM with a lower TP of RM2.90 based on an unchanged 12.5x FY15E Core PER, in tandem with the reduction in our FY15 earnings estimate (previously, OP; TP:RM3.27).

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

 Sharp fluctuation in currency and fuel price.

 War, global political risk, pandemic. 

Source: Kenanga