1Q18 CNP of RM358m is within expectations, accounting for 24%/21% of our/consensus estimates respectively. A 12.0 sen dividend was declared, which is also in line. Hence, no change in our earnings forecast. Reiterate our OP call with lower TP of RM4.80 with near-term catalyst from the sale of Expedia in 3Q18 and finalization/declaration of special dividends from the recent sale of AAC.

Well within expectations. 1Q18 CNP of RM358m is within expectations, accounting for 24%/21% of our/consensus estimates, respectively. The 12.0 sen dividend declared is also within expectations. We derive our CNP after reversing out non-core and oneoff items totalling a net gain of RM784m from (i) the sale of GTR, (ii) deferred tax, (iii) forex gains, and (iv) losses from derivatives.

Result highlights. 1Q18 CNP of RM358m was down 18% QoQ due to contraction of EBIT margins by 11ppt on lower revenue growth of 4% as average fare prices were down 6% as AIRASIA continued to expand their capacities coupled with rising fuel costs as average jet fuel prices were up 13%. 1Q18 CNP was up 20% YoY mainly due to: (i) higher revenue (+15%) as AIRASIA carried 16% more in passengers on an expanded capacity of 19% and (ii) higher contribution from associates (+62%) as Thailand AirAsia’s earnings improved 77% (from THB1,036m to THB1,835m) stemming from better load factors and average fares.

Outlook. For the remainder of FY18, AIRASIA plans to: (i) conclude the sale of Expedia in 3Q18, and (ii) list its Philippines unit. On the back of the expanded fleet of planes, AIRASIA plans to increase their average aircraft utilization rate further from 13.1 hours (as of 1Q18) to 14.0 hours from further restructuring of routes which would boost capacity further. That said, we believe load factors would be maintained at &85%, which is achievable from higher conversions rates from their digital platforms, i.e. websites and mobile apps through easier navigation and dynamic ticket pricing model.

Earnings estimates unchanged. Post results, we make no adjustments to our FY18-19E estimates.

Reiterate OP but with a lower SoP-derived TP of RM4.80 (from RM5.30) after adjusting our valuations lower to 9x FY18E PER pegged to 4-year average (from 10x @ +0.5SD) in line with the broad market de-rating due to foreign outflows. Note that our SoP-derived TP includes RM0.78/share special dividend. We deem our 9x FY18E PER on their core business (pegged at 4-year average) fair given: (i) AIRASIA’s much healthier net gearing post AAC disposal coupled with further asset monetization plans from Santan/Red Cargo/Expedia to honor their intention for special dividends every two years, (ii) the increased focus on higher turnaround domestic routes on the back of weak competition from other domestic airlines, and (iii) strong growth potential on the back of an expanding capacity. We foresee immediateterm catalyst from the finalization of special dividends (anticipating RM0.78) from the recent sale of AAC back in March.

Risks include lower-than-expected load factors and higher-thanexpected fuel costs, and higher-than-expected operating costs.

Source: Kenanga Research - 25 May 2018