KUALA LUMPUR: CIMB Equities Research has lowered its target price for AirAsia Group Bhd to RM1.82 from RM2.12 as it expects crude oil prices to climb while higher airport charges may hurt demand. 

The low-cost carrier’s last traded price was RM3.12. 

The research house had on Thursday raised FY19-20F core EPS by lowering its oil price assumptions but kept its Reduce call as higher airport charges from mid-2019F may hurt demand.

“Our base case is for oil prices to trend higher in FY20F due to slower US production growth and stronger demand for middle distillates post IMO 2020.

“Our target price of RM1.82 is based on CY20F P/E of 10 times and adding our expected special dividend of 19 sen arising from the Castlelake transaction,” it said.

CIMB Research lowered its jet fuel price assumptions from US$90 a barrel to US$75 for FY19F and from US$95 to US$85 for FY20F following significant global overproduction in 2018 and relatively modest efforts by Opec and its non-Opec partners to reduce production in 1H19F. 

It expects oil prices to rise on-year in FY20F because of the slowdown in expected US crude oil production growth and the higher demand for middle distillates expected to emerge from the implementation of IMO 2020 rules. 

“Hence, we view the current low oil prices as a temporary reprieve for airlines like AirAsia,” it said.

It also said AirAsia took advantage of the domestic Malaysian capacity reductions by MAS and Malindo in 2018 by growing rapidly, taking market share and raising yields. However, the rationalisation is over and MAS and Malindo may now be adding back domestic seat capacity, probably to take advantage of lower jet fuel prices. 

“Hence, the period of easy market share gains and yield increase for AirAsia in domestic aviation may be over,” it cautioned.

As for the new departure levy to be imposed on June 1, 2019, it said MAHB would likely be given permission by MAVCOM to raise the aeronautical tariffs by at least 16% from July 1.

Asean passenger service charges (PSC) may be raised by 74% or RM26 per pax while the non-Asean PSC may be hiked by 71% or RM52 per pax, in its view.

Low-cost carriers with price-sensitive customers may struggle to pass on these rate increases in full without hurting demand and if AirAsia subsidises these rate hikes, earnings may be lower than expected.

As for the sale and leaseback (S&LB) of 79 aircraft to BBAM, the transaction yielded excess cash proceeds of
84 sen a share but only 40 sen was paid as special dividend per share (DPS) on Dec 28, 2018, with the difference held as working capital buffer and probably to reward staff. 

“Applying a similar ‘50% rule’ for the 39 sen/share excess cash from the Castlelake S&LB transaction involving 29 planes, we arrive at our estimated special DPS of 19 sen. This is added to our RM1.63/share valuation of AirAsia Group’s core airline business, based on CY20F P/E of 10x, to derive a new target price of RM1.82. 

“Downside catalysts include higher airport charges, resumption of domestic capacity additions by MAS and Malindo and potentially higher jet fuel prices in 2020F. Upside risks include sustained weakness in oil prices due to lack of discipline by Opec producers,” it said.