We maintain our OVERWEIGHT rating on the aviation sector on the back of AIRASIA’s high passenger load factors driven by stronger travel demand and additional capacities coupled with the sale of their leasing arm Asia Aviation Capital. Over 3QCY17, AIRASIA’s share price improved marginally (+2%) driven by: (i) 50% disposal of their groun`=d handling team with gains of RM365.7m, and (ii) the sale of AAC coming closer to fruition with a potential round of special dividends – expected to be concluded by 1Q18. Meanwhile, AIRPORT’s share price remained relatively unchanged over the period. As of 11M17, AIRPORT’s total passenger traffic (for both Malaysia and Turkey) was up 8.1% YTD – in line with our 9.2% target. Targeting FY18E passenger growth rates of 8% for Malaysia and 10% for Turkey. Maintaining our call and TP for AIRPORT (MP; TP: RM8.38). For AIRASIA, we maintain our OP call but lower our TP to RM4.25 (from RM4.75) after updating our valuation basis to 8.0x FY18E PER (from 9.0x FY18E PER) in line with its 4-year average.

3QCY17 Results Recap. In 3QCY17, stocks under our coverage (AIRASIA and AIRPORT) registered relatively better performance vs. 2QCY17 with AIRASIA coming above estimates (86%) from higher-than-expected load factors and average fares while AIRPORT performed broadly in-line (68%) as we expect stronger quarters ahead from a seasonally stronger 4Q.

Share price performance. Over 4QCY17, AIRASIA’s share price improved marginally (+2%), buoyed by disposal gains of 50% of their ground handling team (amounting to RM365.7m with potential round of special dividends of up to 11.0 sen/share) and concluding the listing of IAA on IDX. Meanwhile, AIRPORT’s share price remains relatively unchanged at RM8.50 (-1%).

AIRPORT’s passenger outlook. AIRPORT’s 11M17 total passenger movement for Malaysia and Turkey registered growth of 8.1% YoY-YTD, in line with our estimate of 9.2% (target growth of +10.0% for Malaysia and +7.0% for Turkey). Growth of its Malaysian operations was at 9.3% 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, growth at Turkey of 4.8% has gradually improved from negative MoM growth rates in 1Q17 to double-digit growth rates in Nov 2017 (+10.7%). This was due to recovery of international passenger traffic and domestic passengers as fears over terror attacks, which happened in FY16 tapered off. We are more positive on Turkey’s outlook and are targeting a double-digit growth rate in FY18 of 10%. Meanwhile, we are targeting a slightly lower growth rate in Malaysia of 8% (vis-à-vis 10% in FY17) due to (i) higher passenger base, (ii) absence of booster like the SEA games in 2017, and (iii) weaker currency advantage for foreigners from the stronger MYR. We note that the typical passenger growth rate for Malaysia since 2007 is from 0.6%-18.6%. Also, we are positive on the PSC equalisation of KLIA Main and KLIA2 whereby international ex-ASEAN flights out of KLIA2 (which accounts for c.18% of total international flights to and fro Malaysia) in FY18 will be RM73 (vs. RM50 in FY17) which we have factored into our FY18E CNP of RM315m.

AIRASIA on growth path. 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 have concluded the listing 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 have expanded their aircraft fleet by a net growth of 24 planes; Malaysia +7, Thailand +5, Indonesia +1, Philippines +3, India +6 and Japan +2 bringing total aircraft capacity in FY17 to 196 while still having a total outstanding aircraft order log of c.410 aircrafts. Apart from the increase in fleet size, AIRASIA is also targeting a higher aircraft utilization rate of 13-14 hours (previously c.12 hours in FY16) which would be accretive towards ASK growth (+c.3.0% based on our estimates). On the back of the increased capacities, we believe AIRASIA will be able to maintain healthy load factors of c.85% stemming from: (i) strong travel demand, coupled with their (ii) extensive route options with optimal frequencies. Despite the increased capacity of 5% in 9M17, yields were surprisingly not pressured but registered a growth of 2% instead. This is due to other airlines (Malindo and MAS) rationalising their routes frequencies to avoid intense price wars and seek for more profitable routes elsewhere. Moving into FY18, AIRASIA plans for further fleet growth of another +29 planes which we are positive on the back of increased travel demand (Malaysia +8, Thailand +7, Indonesia +2, Philippines +4, India +7 and Japan +7 to bringing total aircraft capacity by end-18 to 225 planes). For FY18, AIRASIA also aims for increased ancillary income from more targeted marketing/sales in which they have targeted RM60/pax by FY18 (9M17 at RM49/pax).

Unlocking valuable assets. In line with AIRASIA’s promise to dish out special dividends at least once every 2 years, we are positive on AIRASIA’s plans to continue unlocking assets for special dividends with the upcoming sale of AAC (leasing arm) within the near horizon (expected 1Q18). Post disposal of AAC, AIRASIA is expected to lose the stream of leasing income of c.RM400m (assuming 100% stake sale) which we believe would be compensated by a round of special dividends. The AAC disposal is expected to fetch a price tag of USD1.0-1.2b 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.USD1.2-1.3b 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 net gearing of 1.3x (as of 3Q17) to c.0.9x (based on 80% special dividend pay-out) and focus on its airline business. In 2H17, we note that AIRASIA had sold out: (i) their 50% stake in AACE (Asian Aviation Centre of Excellence) for USD100m, and (ii) 50% of their ground handling business stake which booked in gains of RM365.7m. For the first time, AIRASIA had dished out an interim dividend of 12.0 sen in Sept 2017 which we believe is from the disposal of AACE (USD100m). We believe this is the first of many more assets to be unlocked such as: (i) their inflight F&B business ‘Santan’, and (ii) ‘ROKKI’, which provides Wifi service onboard.

Maintain OVERWEIGHT on the sector given the growth prospects of AIRASIA and AIRPORT coupled with market weightage for counters under coverage that have >10% upside. We make no changes to AIRPORT’s MARKET PERFORM call with unchanged TP of RM8.38 @ 1.74x FY18E. Meanwhile, we maintain our OUTPERFORM call on AIRASIA but lower our TP to RM4.25 (from RM4.75) after updating our valuation basis to 8.0x FY18E PER (from 9.0x FY18E PER) in line with its historical 4- year average. We expect AIRASIA to continue registering high load factors post fleet expansion on the back of strong travel demand coupled with their dynamic ticket pricing strategy. We believe that it will be a good time for investors to accumulate, underpinned by the prospect of special dividends.

Source: Kenanga Research - 3 Jan 2018