1H17 CNP came in within our expectations at 55% but above consensus estimates at 60%. We believe the positive deviation against consensus were likely due to their overly conservative average fare estimates. First interim dividend of 12.0 sen was declared, which was above our estimate. On a separate note, AIRASIA also announced; (i) an internal reorganisation structure, and (ii) listing of 57.25% of Indonesia AirAsia (IAA) on IDX. Maintain earnings and reiterate OP with unchanged TP of RM4.05. Within expectations. 1H17 CNP came in within our expectations at 55% but above consensus estimates at 60%. We believe the positive deviation against consensus was likely due to their overly conservative average fares estimates translating to a lower-than-expected RASK. The first interim dividend of 12.0 sen declared was above our FY17 estimates of 6.6 sen. We note that this is the first-time AIRASIA is dishing out an interim dividend since listing which we believe is due to the successful stake sale of AACE of USD100m (RM429m) (refer to report dated 28/8/2017).

Results highlights. 1H17 CNP increased 5% YoY underpinned by 13% increase in revenue (+13%) due to a higher load factor (+4ppt) on the back of higher priced airfares (+5%) despite the increasing ASK capacity (+5%). This was due to the weakening competition within the local space where Malindo and MAS have reduced frequency on a couple of routes, allowing AIRASIA to price their tickets more favourably. 2Q17 CNP of RM478m improved 60% QoQ on the back of higher revenue (+7%) stemming from higher passengers carried (+5%) coupled with higher average fares (+4%) despite the increase in ASK (+5%) due to similar reasons stated above.

ONE AirAsia. Separately, AIRASIA announced an internal reorganisation by undergoing a 1-for-1 exchange of shares with their NewCo – AirAsia GROUP Bhd and subsequently to have all AOC associates (Thai, Japan, Indonesia, Philippines, India) be parked under NewCo alongside with Malaysia AirAsia (currently AIRASIA). The new structure would be more ‘flat’ as compared to the existing structure whereby currently Malaysia AirAsia Bhd (AIRASIA) holds effective stakes of 20%-49% in Indonesia, Philippines, Thailand, Japan and India through their Investment Holding Co (AirAsia Investment Ltd). This move is in line with their plans to eventually have all existing AOC associates to be 100% wholly-owned subsidiaries of the NewCo. That being said, we opine that there are various regulation hurdles in respective countries to overcome and the idea to have all AOC as 100% subsidiaries under one group might not materialize in the near term.

Listing 57.25% of IAA. Furthermore, AIRASIA announced the proposed listing of 57.25% of IAA (AirAsia Indonesia) on the Indonesian Market (IDX) which is expected to be concluded by 4Q17. Positive as it allows IAA to tap into the local equity market in Indonesia (IDX) to raise financing requirements to expedite growth in Indonesia. (Refer back for more)

Outlook. AIRASIA is targeting Thailand operations to be consolidated into their accounts by 4Q17 and list its Philippines division as well. Meanwhile, we note that AIRASIA currently hedged 78% of their fuel at c.USD60/bbl. In regard to the disposal of AAC, AIRASIA has narrowed their bids to 2 final bidders and are underway to finalize the agreement which we believe will be concluded by year end.

Maintaining earnings and call. Post results, we maintain our FY17- 18E earnings estimates. Subsequently, we reiterate our OUTPERFORM call with unchanged TP of RM4.05 based on FY18E PER of 9.0x (5 year average). 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 - 30 Aug 2017