FY17 CNP of RM1.65b is within our estimate (95%) but above consensus (107%) likely due to stronger-than- expected load factors coupled with the higher-than- expected average fares. No dividends were proposed during the quarter, as expected. Its final dividend is typically announced in April. Maintain FY18E earnings and introduce FY19E earnings of RM1.88b. Reiterate OP with higher TP of RM5.25 (from RM4.25) based on higher 10x FY18E PER.

Within expectations. FY17 CNP of RM1.65b is within our estimate (95%) but above consensus (107%) likely due to stronger-than- expected load factors coupled with higher-than-expected average fares. No dividends as expected as final dividend are typically announced in April. We are expecting a 6.0 sen final dividend given that AIRASIA had previously dished out an interim 12.0 sen dividend back in Sept 2017 against our 19.0 sen estimate for FY17.

Result highlights. FY17 CNP of RM1.65b was marginally down 1% YoY despite an 13% increase in revenue due to higher cost factors, i.e. (i) higher staff costs (+21%) from increments towards pilot and engineers salary coupled with higher bonus, and (ii) higher fuel costs (+23%) owing to increase in jet fuel prices (+13%). All these cost pressures led to CASK increasing by 5%. 4Q17 CNP of RM435m was marginally down 2% QoQ albeit the revenue increase (+9%), also due to higher staff costs (+30%), fuel costs (+10%) and higher finance costs (+26%).

Outlook. AIRASIA is striving towards creating One AirAsia by consolidating and owning 100% effective stakes in Thai (current effective interest 45%), Philippines (current effective interest 19.6%), and Indonesia (current effective interest 49%) operations. While we believe the goal is achievable through issuance of new shares at AIRASIA group level and subsequently swapping it with other existing shareholders or associates, we opine that it might not materialize in the near term given that there are still various regulatory hurdles in respective countries to overcome. Meanwhile, AIRASIA is targeting to list Philippines AOC by 2019. For FY18, AIRASIA plans to place higher focus on their domestic routes by transferring out their longer haul 4-hour flights (KUL-Changsa, KUL-Kaohsiang) to AAX for shorter haul domestic flights, which have shorter turnaround time and hence improving profitability from higher plane utilisation. Note that FY17 aircraft utilisation improved 7% to 13.1 hrs vs. 12.3 hrs in FY16. We expect further improvement in utilisation post restructuring of routes. Other cost reduction initiatives taken include consolidating operational staff functions of the group, i.e. 5 separate legal departments of associates being consolidated at Thailand. Furthermore, management is confident to conclude the sale of AAC by 31st March 2018.

Earnings estimates. We make no adjustments to our FY18E earnings of RM1.76b and introduce FY19E earnings of RM1.88b.

Reiterate OP with a higher TP of RM5.25 (from RM4.25). Our TP is based on higher FY18 PER of 10x which is pegged at +0.5SD levels to its 4-year average (previously FY18 PER of 8x @ 4 year average). We opt to apply higher valuations of +0.5SD in anticipation of: (i) the imminent sale of AAC by 31st March which would subsequently lead to a potential round of special dividends, (ii) the increased focus on higher turnaround domestic routes whereby competition from Malindo and MAB has been reduced in FY17, (iii) further asset monetization possibly from Santan/Red Cargo to honor their intention for special dividends every two years, (iv) strong growth potential on the back of an expanding capacity without overly sacrificing yields owing to their dynamic pricing model, and (v) competitive advantage from its low operational costs.

Source: Kenanga Research - 28 Feb 2018