We maintain our OVERWEIGHT rating on the aviation sector on the back of AIRASIA’s: (i) capacity expansion of 30 planes in FY18 while retaining high load factors (>85%), (ii) increased domestic frequencies on the back of less competition from MAB and Malindo as they have strengthened their domestic market position as a result of promotional efforts made in FY17, and (iii) increased aircraft utilisation to 14 hours (from 13) from shorter routes allowing for shorter turnaround time and subsequently higher capacities i.e. ASKs. Over 4QCY17, AIRASIA’s share price rallied 20% from the long-awaited sale of their leasing arm AAC, which fetched a price tag of USD1.185b while AIRPORT’s share price improved 4% as they continued to register healthy passenger growth figures at both Malaysia and Turkey. As of 2M18, AIRPORT’s total passenger traffic (for both Malaysia and Turkey) was up 7.0% YTD – in line with our 8.5% target. Maintaining our call and TP for AIRPORT (MP; TP: RM8.45 based on 1.72x FY18E PBV) and AIRASIA (OP; TP: RM5.30 based on 10.0x FY18E PER). We have chosen AIRASIA as our Top Pick this quarter.

4Q17 share price performance. Over 4QCY17, AIRASIA’s share price rallied 20% from the long-awaited sale of their leasing arm AAC, which fetched a price tag of USD1.185b (from initial indicative price of USD1.0b) with potential special dividend worth up to RM2.6b (RM0.78/share). Meanwhile, AIRPORT’s share price improved 4% as they continued to register healthy passenger growth figures at both Malaysia and Turkey.

AIRPORT’s passenger numbers healthy. AIRPORT’s 2M18 total passenger movement for Malaysia and Turkey registered growth of 7.0% YoY-YTD, in line with our estimate of 8.5% (target growth of +8.0% for Malaysia and +10.0% for Turkey). Our 8.0% growth estimate for Malaysia is premised on further international growth from China, India and other South East Asian countries due to: (i) visa relaxations and (ii) increased capacities by local and foreign carriers. We also expect domestic travel in Malaysia to pick up further moving forward (2M18 registered negative growth rate of 4.4%) from (i) the 14th general election and (ii) as AIRASIA deploy more capacity into the domestic routes. Meanwhile, we are more positive on Turkey’s outlook and are targeting a double-digit growth rate of 10% in FY18 amidst the absence of terror fears, which happened throughout FY16 extending till 1H17. All in, we make no changes to our passenger growth estimates.

Implementation of QoS underway. Meanwhile, the anticipated QoS (Quality of Service) framework to be implemented by MAVCOM from 3Q18 for airports (starting with KLIA1 and 2) with objectives to achieve higher quality of service for passengers would pose downside risks to AIRPORT’s earnings given that MAVCOM has proposed a financial penalty of up to 5% of aeronautical revenue, which would dent our FY18E CNP by 7% for every 1% penalty. That said, in order to mitigate penalties, AIRPORT has increased their planned CAPEX to RM600-700m (from typically RM300m) in FY18-19E to upgrade their infrastructure, i.e. trains, baggage systems and toilets.

The formation of AIRASIA Group. Currently, AIRASIA is undergoing a share swap exercise in which they would be renaming the company as AirAsia Group Bhd (from AirAsia Bhd) in line with their intention to brand AIRASIA as a pure ASEAN airline. In the near future, AIRASIA plans to further consolidate their remaining associates namely Thai, India and Japan Airasia into their books (currently, it has consolidated Malaysia, Indonesia and Philippines). They have concluded the listing of their Indonesian associate on IDX and aims to have their Philippines associate listed by 2H18. 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.

AirAsia’s capacity growth continues. Cumulatively, for FY17, AIRASIA has expanded their aircraft fleet by 24 planes and plans for further fleet growth by another 30 planes in FY18 (Malaysia +8, Thailand +7, Indonesia +2, Philippines +4, India +7 and Japan +7) bringing total aircraft capacity by end-2018 to 225 planes. We are positive on the planned capacity increase as we believe AIRASIA will be able to maintain healthy load factors of >85% while sustaining airfare prices stemming from: (i) strong travel demand, coupled with their (ii) extensive route options with optimal frequencies, (iii) higher digital conversion rates from simpler website navigation, mobile application, (iv) targeted marketing, and (v) dynamic pricing strategy. Despite the increased ASKs of 11% in FY17, average fares were only marginally impacted, by -1%. We believe this is due to AIRASIA increasing their market share within trunk routes as other domestic airlines (Malindo and MAS) rationalise frequencies to avoid price wars. Following the increased market share, AIRASIA is targeting a higher aircraft utilization rate of 14 hours (previously c.13 hours) by focusing on shorter domestic routes in FY18, allowing for shorter turnaround time. All in, we expect ASK growth of c.6% translating to revenue growth c.11% of based on our estimates. In line with the capacity growth, we also expect ancillary income to grow further from more targeted marketing/sales in which AIRASIA has targeted for RM55/pax by FY18 (FY17 at RM49/pax).

Value unlocking. In line with AIRASIA’s promise to dish out special dividend at least once every two years, we are positive on AIRASIA’s plans to continue unlocking assets. While AIRASIA has recently announced the long-awaited sale of their leasing arm AAC, we believe this is among the first of many more assets to be unlocked such as: (i) their inflight F&B business ‘Santan’, (ii) ‘ROKKI’, which provides Wifi service onboard, (iii) Red Cargo, and (iv) Expedia.

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 our FY18-19E earnings estimates for AIRPORT and AIRASIA. Subsequently, we reiterate our call and TP for AIRASIA (OP; TP: RM5.30 based on 10.0x FY18E PER @ +0.5SD) and AIRPORT (MP; TP: RM8.45 based on 1.72x FY18E PBV @ +0.5SD). We have chosen AIRASIA as our top pick this quarter as 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.

Source: Kenanga Research - 4 Apr 2018