• Upgrade  to  BUY  (from  HOLD),  with  a  raised  target  price  of MYR3.25 (from MYR2.60) on positive earnings revision.
• Fuel  price  and  USD/MYR  assumptions  revised;  positive for earnings. Lower  fuel  price  will  help  mitigate  the  soft  yield market, provides flexibility to management’s growth plans.
• AirAsia  will  also  be  the  new  bellwether  in  the  Malaysia airlines sector, replacing MAS which delists today.

What’s New

Our house view for average jet fuel price and USD/MYR in 2015 has been  revised  to  USD100/bbl  (from  USD115/bbl)  and  3.50  (from 3.32). These are highly favourable parameters for AirAsia and form the basis of our earnings and call upgrades.

What’s Our View

AirAsia will deliver solid earnings from 2Q15 onwards as the benefit of lower fuel price trickles  in.  4Q14 and 1Q15 earnings  growth will be  more  modest  as  it  is  saddled  with  fuel  hedges  locked  in  at higher  than  market  prices  (43%  in  4Q14  and  40%  in  1Q15;  both  at USD118/bbl).  The  weaker MYR  against  USD  will  offset  some of  the benefit  as  60%-70% of  its  operating  costs  are  denominated  in  USD. On  a  net  basis,  it  is  still  favourable  and  we  raise  our  FY15-16 earnings by 24.4% and 11.2%.

The current cost environment is very conducive for the Company to push  on  with  its  reform  initiatives.  Idle  aircraft  can  be  reinstated into service, selling excess aircraft is attractive because the strong USD  will  translate  into  higher  value  in  MYR  term.  This  should  also enable its associates to pare down its debts (MYR2,275m as at end 3Q14) and replenish AirAsia’s cash levels.   Upgrade to BUY (from HOLD), with a raised target price of MYR3.25 (from  MYR2.60)  on  positive  earnings  revision.  Our  TP  is  premised on an unchanged 11x FY15 PER, which is on par with global peers.

Source: Maybank Research - 15 Dec 2014