Fair Value : RM3.61 | Recom : Outperform (Upgraded)

9MFY12/12 results trailed consensus. 9MFY12/12 core PBT came in within our forecast but below market expectations.

Low cost the “key weapon”. AirAsia reiterated that low cost is its “key weapon” againt any new entrant to the domestic market. It believes that its key enemy is not a new competitor, i.e. Malindo Airways (Malindo), but its ability to keep its cost down. It said that there is certain “over-reaction” by the market to the Malindo news, of which to a certain extent, has also been “blown out of proportion” by the media.

Yields may hold up despite a more crowded market. While both lowcost air travel markets in Asia and Europe are bracing for more players and hence competition, Asia is still experiencing tremendous growth vis-à-vis Europe that is mature and saturated that means Asia will have more room to accommodate more players and capacity vis-à-vis Europe. For that reason, AirAsia believes that its overall yields and hence margins may not necessarily drop with the entrance of Malindo. Interesting enough, AirAsia in fact just decided to deploy ten new aircraft in Malaysia for FY12/13 vis-à-vis only five according to its original plan as it expects robust demand growth in Malaysia thanks largely to international traffic brought into Malaysia by AirAsia X.

Forecasts. Maintained.

Risks to our view. These include: (1) Lower-than-expected yields achieved; (2) Higher jet fuel cost; and (3) Inability to contain outbreaks of pandemic diseases.

Upgrade to Outperform. AirAsia’s near-monopoly in the domestic low-cost air travel market will be broken with the entrance in Mar 2013 of Malindo. However, we believe AirAsia has many “defences” against it including AirAsia’s true-blue low-cost model (vis-à-vis Malindo’s hybrid or value airline model), stronger balance sheet, bigger size, highly recognised “AirAsia” brand and good safety records. With earnings risk brought about by new entrant Malindo having been more or less priced in by the market (on the back of the recent steep selldown on AirAsia shares), we are now beginning to find AirAsia’s valuations fundamentally attractive. Fair value for AirAsia is RM3.61 based on 12x FY12/13 EPS, in line with benchmark Ryanair’s 1-year forward target PER. Upgrade to Outperform from Trading Buy.

Source: RHB Research - 22 Nov 2012