1Q16 CNP of RM496.6m beats expectations, making up 61% and 58% of our and consensus full-year estimates. No dividend declared as expected. Raised our FY16-17E CNP by 56-61%. Subsequently, we also raised our Target Price higher to RM3.58 and upgrade AIRASIA to OUTPERFORM (previously, MP, TP: RM2.19).

Above. 1Q16 CNP of RM496.6m after stripping off: (i) forex gains of RM464.1m, and (ii) the write-backs for the over provisioning of losses for AirAsia Indonesia (RM122.7m) and AirAsia Inc (RM6.5m) was above expectations, making up 61%/58% of our/consensus full-year estimates. This was due better-than-expected load factors and yields, which are on par with its 4Q15 performance, which caught us off guard as performance in 1Q and 2Q are generally weaker as compared to 4Q.

A record performance. 1Q16 CNP grew by 225% YoY underpinned by several factors such as; (i) further improvements in yields to 12.5 sen/RPK (+17%), (ii) growth in RPK (+26%) as results of higher ASK (+12%) and better load factor of 85% (previously, 75%), (iii) significant decrease in fuel cost (-23%), and (iv) bolstered by the improvement in associate contribution, especially Thai AirAsia, which saw 156% improvements in contribution from RM37.1m in 1Q15.

QoQ 1Q16 CNP was up by 80% was largely due to the decrease in its overall operating costs (-13%), mainly driven by lower fuel cost (-29%). Net gearing improved to 1.8x from 2.3x previously.

Outlook. Going forward, we believe that AIRASIA would be able to emulate its stellar 1Q16 performance if they can maintain its yields and load factors at current levels, as bulk of its fuel costs are already hedged at USD55/barrel. That said, the outlook for its associates in Indonesia and Philippines looks promising as losses are narrowing coupled with encouraging forward booking trend.

Raised FY16-17E earnings by 56-61%. Post results, we raised our FY16E and FY17E earnings higher to RM1,265.3m and RM1,329.8m, respectively as we tweaked our full-year load factor assumption to 83% (from 80%) and our yield assumption to 13.3sen/RPK (previously, 12.2sen/RPK).

Upgrade to OUTPERFORM. Following our upward revision in FY16- 17E, we raised our Target Price higher to RM3.41 based on unchanged 9x FY16E FD PER (previously, RM2.19). While our 56% upward revision in TP might seem high, we do note that there could be further upside as we believe that our revisions in earnings are still conservative, which we look to review again after its 2Q16 results.

Source: Kenanga Research - 27 May 2016