We maintain our NEUTRAL call on the sector, as we believe that passenger traffic growth would likely remain subdued for the rest of the year due to previous air travel tragedies coupled with the lack of near-term catalyst for the sector except low jet fuel prices. However, we are still keeping our OUTPERFORM call on AIRASIA with a lowered Target Price of RM1.86 based on 1.32x FY15E PBV after taking into consideration the potential impairment impact of RM1.57b from amount owed by its associates as we believe that AIRASIA would continue to benefit from the low jet-fuel cost and also the improvement in yields from its associates. As for AIRPORT, we are keeping our UNDERPERFORM call with a lower Target Price of RM6.18 based on SoP, as we do not see any near-term catalyst for the stock.

“Fuelled” by lower jet fuel cost. For 1QCY15, the two aviation stocks under our coverage, namely AIRASIA and AIRPORT, reported mixed bags of results whereby AIRPORT’s 1QCY15 performance was disappointing due to higherthan- expected depreciation & amortisation costs, and finance costs (inclusive of step up in utilisation cost) arising from Sabiha Gocken International Airport (SGIA). On the flip side, AIRASIA’s performance was well within expectations mainly driven by lower jet fuel costs.

YTD share price performance. As at our cut-off date of 26th June 2015, AIRASIA has plunged by 43%, despite having registered a satisfying 1QCY15 performance due to lower jet fuel cost. We believe that the extreme poor performance in AIRASIA’s share price was mainly due to investors’ concerns over AIRASIA’s accounting policy. As for AIRPORT, they also registered a negative return of only 4%, due to uninspiring passenger traffic growth coupled with higher-than-expected operating costs arising from its overseas investment.

Banking on lower fuel cost for AIRASIA. As we do not expect a strong traffic growth (+7%, YoY) in passengers carried by AirAsia Malaysia and its yields to remain flattish at the range of 11sen/RPK, we believe that AIRASIA’s profitability strongly hinges on lower jet fuel cost. To recap, its fuel cost per available kilometre was down by 20% to 5.4 sen YoY in 1QCY15 which was one of the major drivers of its 1QCY15 core net profit growth of 21%, YoY.

Subdued passenger traffic growth. On a cumulative basis up till May-15, AIRPORT registered total passenger traffic of 44.5m (inclusive of SGIA) (+4.2%, YoY). The total passenger traffic of 44.5m was still within expectation, making up 41% of our full-year passenger traffic estimates of 109.3m. AIRPORT registered passenger traffic of 34.3m (+0.7%, YoY) which was also within expectations, making up 40% of our full-estimates of 86.7m passenger traffic for its Malaysia operations. Its international passenger traffic saw a decline of 1.8%, while its domestic passenger traffic saw a marginal growth of 3.2%, YoY. The negative growth on its international segment was mainly due to the decline in passenger traffic from China (Chinese New Year), while the marginal increase in domestic passenger traffic was due to a traffic boost in March due to school holidays. Nonetheless, we opine that the travel demand for its Malaysia operations remains fairly weak due to the major decline in traffic from China and Middle East, coupled with the rise of living cost in Malaysia could further dampen the domestic traffic growth. On a positive note, their overseas investments Sabiha Gocken International Airport are still seeing strong double-digit growth of 20%, due to low base effect.

Unexciting times ahead. Moving into 3QCY15, we do not expect any excitement from both AIRASIA and AIRPORT as we expect their upcoming 2Q15 results which are set to be released in August-15 to be flattish due to uninspiring yields for AIRASIA and subdued passenger traffic growth for AIRPORT. However, we believe the focus would be on AIRASIA especially on the performance of its associates in 2H15 i.e. Indonesia AirAsia and Philippines AirAsia as management gave a strong commitment to the market, to continue to drive these two associates back to profitability.

NEUTRAL maintained. Post 1QCY15 reporting season; we downgraded our Target Prices for both AIRASIA and AIRPORT to RM1.86 and RM6.18, respectively. We are still keeping our OUTPERFORM call on AIRASIA with a lowered Target Price of RM1.86 based on 1.32x FY15E PBV after taking into consideration of the potential impairment impact from amount owed by its associates as we believe that AIRASIA would continue to benefit from low jet-fuel cost and also the improvement in yields from its associates. (Kindly refer to our report on AIRASIA dated 19/06/15 for the scenario analysis on the potential impairment on the amount due by its associates). As for AIRPORT, we are also keeping our UNDERPERFORM call with a lower Target Price of RM6.18 that is based on SoP, as we do not see any near-term catalyst for the stock. Hence, we are reiterating our NEUTRAL call on the sector, as we believe that passenger traffic growth would likely remain subdued for the year due to the previous air travel tragedies coupled with the lack of near-term catalyst for the sector except for low jet fuel prices.

Source: Kenanga Research - 3 Jul 2015