INVESTMENT HIGHLIGHTS

• 1QFY17 results were within expectations

• IAA and PAA consolidated in 1QFY17 numbers

• Airasia to be re-floated under the AirAsia Group

• Airasia China has all the fixings to be a successful venture

• Maintain BUY with TP of RM3.94

1QFY17 results were in line. AirAsia recorded 1QFY17 consolidated core PATAMI of RM275m (+34%yoy against pro forma 1QFY16). Despite representing 20% of ours and 21% of consensus forecast, we deem the results to be in line as we expect improvements in IAA and PAA.

IAA and PAA consolidated in 1QFY17 numbers. AirAsia released its inaugural consolidated accounts which now reflect combined figures for MAA, IAA and PAA. This follows its recapitalisation exercise for IAA and PAA through the conversion of receivables into perpetual securities. Airasia would now be looking to further consolidate TAA, AAI and JAA subject to the greenlight from each country’s regulators.

AirAsia to be re-floated under the AirAsia Group. The consolidation exercise is part of AirAsia’s plans to re-float under a holding company - the AirAsia Group, which would replace its current listing status. The holding company would have under its umbrella, each individual operating company (AOCs) such as MAA, IAA, PAA, TAA, AAI, etc. In contrast, the current listed entity, AirAsia Berhad plays dual roles: 1) it operates the Malaysian business and 2) it houses all other AOCs.

While no timeline was provided, we assess that the exercise would garner both Pros and Cons:

Pros: 1) The new holding company would consolidate all accounts under its namesake AirAsia brand, reflecting the true health of the entire group as opposed to equity accounting which stops recognising losses once equity interest turns negative; 2) AirAsia Berhad would no longer benefit from operating lease income from associates and; 3) cost savings could be obtained through bulk procurement and shared departments.

Cons: It would be more difficult to gauge the performance of each individual AOC as both the accounts and operating statistics would be fully consolidated.

In all, we are positive on the developments. The AirAsia Group is becoming increasingly complex with a different shareholding and reporting structure for each AOC. As it continues to grow in size and stature, with Vietnam and China soon to enter the fray, we believe that full consolidation would help alleviate some of these complexities.

We expect the Group to perform reasonably well in 2017:

1) ASK is forecasted to rise +10% through the addition of 29 new aircraft for the Group.

2) Market share would be prioritised, focusing on load factors with slight erosion in average fares expected.

3) CASK could improve through increasing aircraft utilisation rates and pooling of resources among AOCs.

AAC sale is on track, with a sale likely to be concluded by 3QCY17. Management briefly updated us that they have narrowed down the bidders to the final two. The bulk of the proceeds from the sale would likely be distributed as special dividends, in our view.

AirAsia China has all the fixings to be a successful venture. Shedding some light on its latest venture, AirAsia China targets to operate a fleet of 50 aircraft in 5 years. Meanwhile, its involvement in setting up an LCC terminal would mainly be in consultancy and would not involve a capital outlay. As a launchpad into the Middle Kingdom, the Henan government has granted AirAsia China favourable incentives for 10 years with possible extensions. We are optimistic of the venture for a variety of reasons:

1) AirAsia would be the first foreign airline to set up a JV in China. This is no small feat, in our view, as a host of established suitors had also expressed their interest.

2) Zhengzhou is a less saturated aviation market compared to first-tier and other more prominent second-tier Chinese cities, thus potentially offering better growth opportunities.

3) Local LCC’s have a foothold on domestic routes at Zhengzhou, but foreign routes are up for grabs. Coincidentally, foreign routes are an area where AirAsia excels in, given its voluminous regional bases and route network.

4) Strong partner in the Henan State Government and the China Everbright Group. The China Everbright Group in particular, is financially sound and able to inject capital into AirAsia China if necessary.

Maintain BUY with slightly lower TP of RM3.94 (from: RM4.06). We adjusted our FY17F and FY18F numbers to reflect the consolidation of IAA and PAA, which partly resulted in a downward revision to FY17 and FY18 earnings by -9% and -5% respectively. Our TP derived from a forward price-to-earnings ratio of 10x FY18 EPS. Airasia remains our top aviation sector predicated on: 1) stable demand growth with conservative ASK expansion of +10%; 2) monetisation of AAC that could potentially lead to special dividends; 3) further consolidation of all AOCs under the AirAsia Group would provide better clarity on combined performance of all AOCs as opposed to MAA.

Source: MIDF Research - 26 May 2017