2QCY17 Results Recap. In 2QCY17, stocks under our coverage (AIRASIA and AIRPORT) registered decent performance with AIRASIA coming in line with estimates (55%) while AIRPORT was broadly in-line (41%) as we expect stronger quarters ahead from a seasonally stronger 4Q.

Share price performance. Over 2QCY17, AIRASIA’s share price continued to improve, by 7%, buoyed by disposal of AACE, listing of IAA on IDX and the anticipated disposal of AAC and the potential special dividends to be dished out by 2H17 (refer below for more). Meanwhile, AIRPORT’s share price remains relatively unchanged at RM8.64.

AIRPORT’s passenger outlook. AIRPORT’s 8M17 total passenger movement for Malaysia and Turkey registered growth of 9.1% YoY-YTD, in line with our estimate of 9.2% (target growth of +10.0% for Malaysia and +7.0% for Turkey). However, breaking this down, we note that the growth was mainly supported by its Malaysian operations, which was up 11.0% while Turkey was only up marginally by 3.5%. Malaysian operations passenger growth remains robust, supported by improved load factors from strong travel demand buoyed by visa relaxations, currency advantage and various tourist promotional efforts coupled with new foreign airlines operating at increased frequencies. Meanwhile, Turkey’s travel statistics have shown improvement since March 2017, registering positive growth ranging from +0.3% to +12.3% YoY till August; as compared to negative growths since June 2016 when Turkey was still reeling from bombing incidents and travel threats. We are seeing tourist numbers recovering while the Turkey referendum on the back of strengthening democracy will deter political upheavals like the military coup in 2016. That said, we note that our Turkey growth target of +7.0% might be slightly ambitious given that YTD growth at Turkey is only 3.5%, as their domestic passenger’s growth in Turkey is still relatively unstable. Note that domestic passengers typically make up 2/3 of Turkeys total traffic volume. Hence, we look to review our 3Q17 numbers in October if any downward revision is needed. Should we cut our FY17E Turkey growth estimate to 4% growth (from 7%), it will lower our FY17E CNP by c.7%.

For Budget 2018, AIRPORT hopes that the Government will allocate funds for them to expand their existing Subang Airport which is already operating at the designed capacity of 3.0m passengers/annum. We note that Subang Airport recorded 2.8m passengers in 2016 and 3.1m passengers in 2015. According to news sources, AIRPORT plans to increase their capacity in Subang to 5.0m passengers with a tentative investment amount of RM150m-RM200m. While AIRPORT has already submitted a request to the Government for the planned capacity increase, we do not place high hopes for AIRPORT in Budget 2018 given that the previous five Budgets were disappointing for the aviation sector with no capex allowances allocated for the sector. Currently, other airports undergoing expansion are the Sultan Ismail Petra Airport in Kota Bharu and the new Mukah airport (RM453.3m) in Sarawak slated for completion in 2019.

AIRASIA’s long-term growth underway. In the near future, AIRASIA eyes to further consolidate their remaining associates namely Thai, India and Japan Airasia into their books (currently, it has consolidated Malaysia, Indonesia and Philippines). Recently, they listed their Indonesian associate on IDX and aims to have their Philippines associate listed by 2018. We are generally positive on the listing of its associates as this allows for their respective associates to tap into their local capital markets to expedite growth. Cumulatively, for FY17, they are looking to expand their aircraft fleet by a net growth of 22 planes; Malaysia +10, Thailand +3, Indonesia +2, Philippines +3 and India +4. Recently, AIRASIA placed additional orders for 14 A320ceo aircraft; increasing their total outstanding aircraft order log to c.410 aircrafts. Apart from the increase in fleet size, AIRASIA is also targeting a higher aircraft utilization rate of 13.0 hours (previously 12.0 hours) which would be accretive towards ASK growth (+c.3.0% based on our estimates). On the back of the increased capacities, we believe AIRASIA is able to maintain healthy load factors of >80% stemming from: (i) strong travel demand, coupled with their (ii) extensive route options with optimal frequencies. Despite the increased capacity of 5% in 1H17, yields were surprisingly not pressured despite heightened competition. We believe this is due to other airlines (Malindo and MAS) already reducing routes frequencies to avoid intense price wars and seek for more profitable routes elsewhere. Furthermore, AIRASIA aims for increased ancillary income from more targeted marketing/sales in which they have targeted RM55/pax in FY17 and RM60/pax by FY18 (vs RM48/pax in FY16. Despite the rising fuel costs, we believe AIRASIA’s fuel risks are greatly minimized as 78% of FY17 fuel is hedged at USD60/barrel which we have factored into our assumption; comparable to FY16 average effective fuel costs of USD56/barrel. While FX (USD/MYR) might also be a concern, we note that AIRASIA’s FX risks are partially mitigated through: (i) ticket sales, which are 30% denominated in foreign currency, and (ii) 50% USD borrowings for planes hedged at 3.2 USD/MYR. Our analysis indicates that a 10.0 sen depreciation of MYR against USD would decrease FY17E CNP by 2.6%.

A leaner airline. Post disposal of AAC, AIRASIA is expected to lose the stream of leasing income of c.RM400m in FY17 (lowering FY17E CNP by 29% to c.RM1.0b) which we believe would be compensated by a round of special dividends. The AAC disposal is expected to fetch a price tag of USD1.0b-1.2b (equivalent to RM4.4b-5.3b) which comprise: (i) AAC’s 29 existing aircrafts plus another 7 planes yet to be novated into their books – bringing it to a total of 36 aircrafts, (ii) 38 AIRASIA’s planes for a sale and leaseback with AAC, i.e. AIRASIA will sell 38 planes to AAC for c.USD1.2b-1.3b and lease them back from AAC, (iii) portfolio of 14 spare engines from AIRASIA worth c.USD93.0m, and (iv) an option for AAC’s prospective buyer to take up to 30% of planes from AIRASIA’s c.410 planes order-book (299 A320neo’s and 100 A321neo’s yet to be delivered by Air Bus). Assuming a 100% stake sale of AAC at USD1.0b (USDMYR of 4.4), an 80% dividend pay-out would translate to RM1.05 of dividend/share. However, we have yet to factor this in into our estimates as the final amount and portion of the stake sale remains uncertain. We are positive on the monetisation of AAC as it allows AIRASIA to lighten its balance sheet from current 1.3x (as of 2Q17) to c.0.9x (based on 80% special dividend pay-out) and focus on its airline business.

Maintain OVERWEIGHT. Since our downgrade on AIRPORT to UNDERPERFORM (report dated 12th September 2017) due to its high trading valuations, AIRPORT’s share price has come down 5% from a high of RM9.08 to RM8.64 (based on our cut-off date of 21/9/2017). Given the correction in share price, we upgrade AIRPORT to MARKET PERFORM (from UP) with an unchanged TP of RM8.38 as the downside in share price is largely discounted. We note that should we trim Turkey growth rate to a more achievable rate of +4.0% (from current target of +7.0), there will only be a slight adjustment in AIRPORT’s TP of RM8.38 to RM8.35 based on the unchanged 1.74x FY18E PBV which is still within our stipulated MP range. Meanwhile, we expect AIRASIA to continue to register high load factors post fleet expansion on the back of strong travel demand coupled with their dynamic ticket pricing strategy. We make no changes to AIRASIA’s OP call with an unchanged TP of RM4.05 based on 9.0x FY18E PER (5-year Fwd. Average) as we believe that it will be a good time for investors to accumulate, underpinned by the prospect of special dividends. Maintain OVERWEIGHT recommendation on the sector given that market weightage for counters under coverage has >10% upside.

Source: Kenanga Research - 4 Oct 2017