1H16 CNP of 1H16 CNP of RM780.9m came in above expectations, accounting for 62% and 65% of our and streets’ full-year estimates, respectively This is largely due to our higher cost assumption, CASK of 15.3 sen vis-à-vis its 1H16 CASK of 12.7 sen. No dividends declared as expected. Post adjustment in operating cost, FY16E and FY17E CNP upgraded by 19% and 17%, respectively. Maintain OUTPERFORM, TP raised to RM3.82 based on 9x FY17 FD PER (previously, RM3.41 on 9x FY16 FD PER).

Above expectations. 1H16 CNP of RM780.9m came in above expectations, accounting for 62% and 65% of our and streets’ fullyear estimates, respectively. This is largely due to our higher cost assumption, CASK of 15. 3sen vis-à-vis its 1H16 CASK of 12.7 sen. No dividends declared as expected.

Results highlight. YoY, 1H16 CNP saw a significant surge of 198% on the back of 27% growth in revenue that was driven by better load factor of 86% vis-à-vis 78% in 1H15 albeit 11% growth in capacity i.e. ASK (m). That said, the improvement in yield (sen/RPK) and its ancillary revenue per pax, which increased by 10% was also the main driver of the significant improvements in profitability.

QoQ, its 2Q16 CNP came off by 43% despite a marginal decline of 4% in revenue. This is mainly due to the increased operating costs driven by higher staff costs (+16%) as a result of a higher bonus pay-out, and higher maintenance and user fees (+9%).

Outlook . Going forward, we remain positive on AIRASIA’s outlook premised on low jet fuel cost, improving yields through further improvement in ancillary income per pax of which they aspire to hit RM50/pax in the medium-term and RM60/pax in the longer term through the introductory to more in flight products, passengers load factors and ancillary income. That said, we also remain excited with their divestment plans, especially its leasing arm i.e. AAC, which is expected by 4Q16 with a potential special dividend pay-out.

Earnings upgrade. Post results, we upgraded our FY16-17E core earnings higher as we reduce our FY16-17E CASK assumption down by 4.8-1.7%. The reduction in CASK assumption lifts our FY16-17E CNP by 19-7%. Our fuel cost assumption for FY17 is on the conservative end at average of 80USD/bbl, despite AIRASIA having it hedged 45% of its requirement at 58USD/bbl.

Maintain OUTPERFORM. We are reiterating our OUTPERFORM call on AIRASIA based on a higher Target Price of RM3.82 as we roll forward our valuation base year to FY17E with an unchanged 9x FD PER (previously, TP: RM3.41 pegged to 9x FY16E FD PER). We continue to like the stock for its growth potential, competitive advantage in the aviation industry for its low operating costs and a potential special dividend from its divestment in AAC.

Source: Kenanga Research - 30 Aug 2016