We maintain NEUTRAL on the sector, as we do not see any near-term catalyst that could excite the sector, especially when passenger traffic growth is expected to remain uninspiring this year. However, we are still keeping our OUTPERFORM call on AIRASIA with an unchanged Target Price of RM1.86 as we believe that AIRASIA will continue to benefit from the low jet-fuel cost and also yield improvement from associates, albeit we are expecting some compression in yields domestically. As for AIRPORT, we are keeping our UNDERPERFORM call with a lower Target Price of RM5.24 based on SoP, due to consistent earnings disappointments.

AIRPORT, a consistent let-down... As we review our aviation stock earnings performance in 3QCY15, AIRPORT had been a consistent letdown for the past three quarters due to higher-than-expected operational costs stemming from high staff cost. On the contrary, AIRASIA had been recording satisfactory results for the past three quarters thanks to lower jet fuel costs and a minor recovery in yields due to capacity cut by competitors, i.e. MAS.

Uninspiring share price performance. At our cut-off date of 23-Dec-15, AIRASIA’s share prices have not recovered from its plunge of 53%, mainly due to foreign selling coupled with the concerns over the profitability of its associates, i.e. AirAsia Indonesia and AirAsia Philippines. That said, AIRPORT did not perform any better than AIRASIA in the same period registering negative returns of 13%, which we believe was partly due to foreign selling coupled with disappointing results due to higherthan- expected operating costs arising from high staff costs.

Passenger traffic growth slow but still inline. As of end-Nov 15, AIRPORT registered total passenger traffic of 101.7m (inclusive of SGIA) (+4.9%, YoY) which was within expectation, making up 95% of our full-year passenger traffic estimates of 107.5m. For its Malaysian operations, AIRPORT registered passenger traffic of 75.6m, which represent a smallish growth of 0.7%, YoY; slightly disappointing as it only makes up 91% of our full-year passenger traffic estimates of 84.9m. On a positive note, SGIA’s passenger traffic of 26.0m (+19.5%) was ahead of our full-year estimates of 22.6m by 15%. While its passenger traffic numbers are coming inline with our expectations thanks to SGIA traffic, we deem that AIRPORT has to do better to improve its passenger traffic growth in Malaysia and strive to reduce its operational costs stemming from the operations at KLIA2, else we do not see any catalyst for AIRPORT in the near-term even if they manage to secure the extension of their operating agreement.

What’s in 2016? In 2016, we still prefer airlines over airport operators mainly due to the low jet fuel advantage enjoyed by the airlines. However, the operating environment will not be any easier for the airlines as we expect some minor compression in yields due to the entry of new airline in the domestic space namely Rayani Air, while low jet-fuel cost could potentially spur another round of price wars among airlines like AIRASIA, AAX, MAS, MALINDO, and Rayani Air both in the domestic and international space. That aside, we also believe that the limelight is still on AIRASIA in 1QCY16, as investors will be tracking closely its performances, especially its associates' performance i.e. AirAsia Indonesia and AirAsia Philippines on its turnaround status.

NEUTRAL maintained. All-in, we are maintaining our NEUTRAL recommendation on the sector as we believe that the operating scene in the aviation industry will be highly competitive in 2016, especially when airlines embark on another round of price wars to grab market share coupled with passenger traffic growth that is likely to remain subdued as international traffics have not seen much recovery from previous air tragedies. Nonetheless, we are still keeping an OUTPERFORM call on AIRASIA with a Target Price of RM1.86, while our UNDERPERFORM recommendation on AIRPORT remains unchanged with a lower Target Price of RM5.24, lowered from RM5.90 previously due to the consistent disappointment in earnings. 

Source: Kenanga Research - 7 Jan 2016