• Core PATAMI within expectations

• MAA’s operating performance was mixed in 4QFY16

• We expect MAA’s performance to be stable in 2017

• AAC sale to be the highlight of 2017

• Maintain BUY with unchanged TP of RM3.45

Core PATAMI within expectations. AirAsia recorded 4QFY16 revenue of RM1.9b (+15%yoy on adjusted 4QFY15 revenue) and core PATAMI of RM406m (-13%yoy). This led Airasia to a full year FY16 revenue and core PATAMI of RM6.9b (+10%yoy) and RM1.4b (+55%yoy) respectively which met our forecast at 104% of our full year profit estimate.

MAA’s operating performance was mixed in 4QFY16: 1) Load factors were mildly disappointing. While the load factor of 87% recorded in 4QFY16 was commendable by most standards, we were slightly disappointed having witnessed a record load factor of 89% in 3QFY16. We had expected Airasia to record a load factor of 90% in 4QFY16 due to the long school holidays. RPK rose by +8%yoy in the fourth quarter, which was lower than the preceding three quarters which recorded double-digit increases. 2) RASK-CASK spread widened further. Positively, Airasia’s normalised operating margins improved +5ppt in 4QFY16 underpinned by an expansion of RASK (revenue per ASK) and an improvement in CASK (cost per ASK). RASK-CASK spread widened by 4ppt (+2ppt), supported by a +5%yoy growth in average fares and a -20% reduction in fuel expenses. 3) MAA took delivery of 3 new Airbus A320neo aircraft. However, fleet size was reduced to 77 aircraft from 80 a year prior as MAA retired older aircrafts. MAA has a planned fleet growth of 8 new Airbus A320neo aircrafts in FY17 which would help reduce fuel expenses further with 15% less fuel consumption.

We expect MAA’s performance to be stable in 2017:

1) ASK is forecasted to rise +10% with a priority of launching new routes to second and third tier cities in China as well as India. 2) Load factors will be the primary focus in 2017 which would drive ancillary income. 3) Average fares might take a backseat as competition heats up. That being said, management is fairly confident that demand growth will outweigh capacity increases in 2017. 4) Continual emphasis will be placed on reducing CASK, with low-hanging fruit being an increase in aircraft utilisation rates which boosts efficiency.

AAC sale to be the highlight of 2017. Asia Aviation Capital (AAC), which is Airasia’s leasing arm, has increased its fleet size to 63 aircraft (FY15: 41). The leasing unit is the lessor for Airasia’s associates including TAA, IAA and PAA. We understand that Airasia has set 27th March 2017 as the closing date for receiving bids and a 4-5 week period for the board to deliberate on the best suitor. This will be followed by an EGM and other approvals. All in, we believe the sale could be concluded by the third quarter of 2017. In our opinion, a favourable conclusion to the sale of AAC would be the highlight for Airasia in 2017, considering special dividends might be on the cards.

Maintain BUY with unchanged TP of RM3.45. Our valuation is based on a price-to-earnings ratio of 8.5x FY17 EPS. We like Airasia as one of our top aviation sector picks predicated on: 1) stable demand growth with conservative ASK expansion of +10%; 2) monetisation of AAC that could potentially lead to special dividends; 3) progress in turning around of IAA and PAA; 4) growth in Airasia India and Airasia Japan.

Source: MIDF Research - 24 Feb 2017