INVESTMENT HIGHLIGHTS

• 1HFY17 results well within expectations

• Malaysia-Indonesia-Philippines showing its mettle

• Better competitive environment helped too

• We believe the corporate proposals are value-enhancing

• Maintain BUY with TP of RM3.94

1MFY17 well within expectations. AirAsia reported 2QFY17 core PATAMI of RM391.8m (+8%yoy, +42%qoq) which contributed to a cumulative 6MFY17 core profit of RM667m (+61%yoy). The results were in line with both ours and consensus estimates, accounting for 54% and 52% of respective full year forecasts.

Malaysia-Indonesia-Philippines showing its mettle. For the first half of 2017, consolidated ASK grew +5% while witnessing high take-up rates with RPK rising at a faster pace of +9%yoy. This led to a +3ppt gain in load factors which averaged at 89%, a record for AirAsia. Positively, the high loads did not erode average fares which actually rose +4%yoy in 1HFY17. All ASEAN AOC’s (MAA, TAA, IAA and PAA) were profitable for the first time, an encouraging sign for the future.

Competition ceding airspace. Part of AirAsia’s good performance in the first half could be attributed to a slightly better competitive landscape. AirAsia observed that its competitors in Malaysia (MAB & Malindo), Thailand (Nok), Philippines (Cebu) and Philippines (Lion Air) have either suspended routes, reduced frequencies or made losses. Instead of slowing down, AirAsia intends to put more pressure on rivals, by adding 22 aircraft or ~20% to its existing in 2HFY17: MAA +10, TAA +3, PAA +3, IAA+2, AAI +4). We expect strong ASK growth in 2HFY17.

Corporate proposals aimed at unlocking the value of AirAsia. The company was briefly suspended on Bursa Malaysia yesterday, and announced that it is proposing two corporate exercises: 1) To replace its current listing status, AirAsia Berhad (AAB) with a holding company, AirAsia Group Berhad and a reorganisation of its existing corporate structure. 2) A listing of IAA through a reverse takeover (RTO) exercise of PT Rimau Multi Putra Pratama TBK (RMPP), which is listed on the IDX.

The proposals are indeed value-enhancing. The change of listing status, with a new holding company AirAsia Group Berhad assuming the role of listed entity is positive in our view. With the reorganisation, there would be clearer segregation of entities (e.g. airlines operations, intellectual property, digital services, ground handling, cargo and others) compared to the current Group structure which is opaque. In addition, the new structure marks the first step in AirAsia’s goal in creating a single Asean airline. On the other hand, IAA’s listing on the IDX would allow it to tap into the Indonesian equity markets for funding while allowing AirAsia to unlock the value of IAA as a listed entity.

Not forgetting the sale of AAC. Group CEO, Tan Sri Tony Fernandes reiterated that the sale of AirAsia’s leasing arm, Asia Aviation Capital (AAC) is on track, with the board endeavouring to maximise the value of the unit. At this juncture, we remain confident in AirAsia’s ability to profitably hive off its aircraft leasing arm. Barely a week ago, AirAsia announced the divestment of its 50% stake in the Asian Aviation Centre of Excellence Sdn Bhd (AACOE) to CAE International Holding Ltd (CAE) for US$100m (RM429.3m).

AirAsia Expedia next on the list of divestment? AirAsia maintains a 25% stake in AirAsia Expedia, of which its intention to pare down its stake is well known. Back in Feb-2015, AirAsia sold a 25% stake in AirAsia Expedia for US$86.25m, booking a gain of US$78.76m. We believe that AirAsia Expedia could be worth more today, considering that the travel and leisure industry has expanded since then. We believe that the divestments (AAC, AirAsia Expedia and AACOE) could likely lead to special dividends, which we have yet to factor into our forecasts.

Maintain BUY with unchanged TP of RM3.94. 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 could provide better clarity on combined performance of all AOCs as opposed to MAA.

Source: MIDF Research - 29 Aug 2017