This morning, Macquarie Equities Research (MQ Research) released a report on AirAsia, ahead of its 2Q16 earnings announcement due 29th Aug. In the report, MQ Research raised AirAsia’s target price (TP) by 33% to RM4.65, the highest TP on the street. MQ Research also forecast that AirAsia will deliver its highest ever profit in the financial year ending 2016 (FY16E).

Event

• MQ Research raises its target price for AirAsia further by 33% from RM3.50 to RM4.65, the highest TP on the street. MQ Research sees another 58% upside from the current share price, on top of the 136% gain YTD vs a flat FBMKLCI, MQ Research believes to be driven by an earnings upgrade post a strong 2Q result due at the end of Aug 2016.
• MQ Research’s 2Q16 estimate of ~RM290m (+184% YoY), if it materialises, will bring 1H16 to represent 68% of consensus FY16E. The stock is trading on a 6.5x 17E EV/EBITDAR based on MQ Research’s revised estimates. MQ Research’s TP of RM4.65 implies a 17E EV/EBITDAR multiple of 8.9x, slightly higher than its historical forward multiple of 8.3x, but MQ Research believes it is justified as MQ Research expects AirAsia to deliver its highest ever profit in FY16E.

 
Impact

• 2Q16 forecast of ~RM290m (+184% YoY). MQ Research expects revenue growth of 18% in the quarter to be driven largely by the 19% traffic growth and a 2% increase in pax yield. MQ Research’s bullish view on pax yield is premised on the improved rationality in the Malaysian marke. MQ Research are expecting unit cost (CASK) to remain flattish on the back of a 6% weaker Ringgit. The share of profits from Thai AirAsia of RM39mn is expected to be bigger than the losses at its Indonesian and Indian associates. Given a strong load factor of 91%, we expect its Philippine associate to be profitable in 2Q16.

• 1H16 to make up 68% of consensus RM1,185m PAT estimate for FY16E, if MQ Research’s 2Q16 estimate materialises. MQ Research revised FY16-17E estimates are 13-29% above consensus.

• Downside risks to MQ Research’s recommendation. Declining pax yield is the biggest risk to MQ Research’s recommendation. Asian airlines in general are showing yield declines while MQ Research are expecting AirAsia to have a positive yield growth of 2% in 16E. MQ Research believes AirAsia is able to beat the trend given the market rationality in Malaysia. Additionally, AirAsia is not exposed to the weak long-haul routes. Interestingly, Chinese airlines have said that they are more focused on long-haul markets this year instead of ASEAN due to lower yield in ASEAN as a result of LCC competition – a positive for AirAsia as 14% of its capacity is to China, and China is its biggest growth market in FY16E.

 
Earnings and target price revision

• MQ Research raises FY16-18E adjusted profit by 29-48% mainly on the back of stronger load factors and higher yield assumptions, which is however offset by the weaker Ringgit assumption. MQ Research raised AirAsia’s TP by 33% to RM4.65 from RM3.50.

 
Price catalyst

• 12-month price target: RM4.65 based on a Sum of Parts methodology.

• Catalyst: 2Q16 earnings announcement due on 29 Aug 2016

 
Action and recommendation

• Reiterate Outperform.

Source: Macquarie Research - 16 Aug 2016