From this quarter (1Q17) onwards, we note that AIRASIA has consolidated their previous associates namely Philippines AirAsia and Indonesia AirAsia into their accounts.

1Q17 CNP of RM298m was within our and consensus expectations making up 21% and 23% of estimates, respectively. No dividends declared as expected. Maintain our FY17-18E earnings. Maintain our OP call with a higher TP of RM4.10 (from RM3.82) after rolling forward valuation base year to FY18.

Within expectations. 1Q17 CNP of RM298m was within our and consensus expectations making up 21% and 23% of estimates, respectively. We derive our CNP after stripping out (i) forex gain of RM57m, (ii) mark to market loss on derivatives of RM63m, (iii) Remeasurement gain on consolidation and negative goodwill on consolidation of RM342m and (iv) deferred tax asset of RM17m. No dividends declared as expected.

Results Highlight. 1Q17 CNP of RM298m was down 29% despite the increased load factors of 4ppt due to higher CASK of 14% while RASK only grew marginally at 3% leading towards compression in margins. The increased CASK was due to higher operating expenses namely staff costs (+27%), depreciation (+6%), fuel (+25%), and aircraft leasing expenses (+22%). We note that the increase in staff costs were due to revision of staff remuneration package in 4Q16 while fuel cost was attributed to higher fuel cost/barrel of USD67 vs USD56 in 1Q16. 1Q17 CNP was down 48% QoQ mainly due to lower RASK (-8%) from lower average fares (-12%) given the lack of the year-end seasonal factor. That said, we note that ancillary income/pax increased by 2ppt.

Outlook. Going forward, AIRASIA is pushing for all their remaining associates namely Thai, India and Japan to be consolidated within their accounts. Management is targeting Thai to be consolidated by 2Q17 while the remaining 2 by the end of the year. Meanwhile, we note that AIRASIA has currently hedged 75% of their fuel at USD59. In regards to AAC, AIRASIA has narrowed their bids to 2 final bidders and are underway to finalize the agreement which we believe would be concluded by year end.

Maintain FY17-18E earnings. Post results, we make no changes to our FY17-18E CNP of RM1417m-RM1521m.

Maintain OUTPERFORM. We are reiterating our OUTPERFORM call on AIRASIA with a higher Target Price of RM4.10 (from RM3.82) after rolling forward valuation base year on unchanged PER of 9.0x. We continue to like the stock for (i) its growth potential, (ii) competitive advantage in the aviation industry from its low operating costs, (iii) special dividend from the sale of AAC and (iv) further cost optimisation plans.

Source: Kenanga Research - 26 May 2017