INVESTMENT HIGHLIGHTS

• AirAsia’s success a result of its cost discipline

• Best days are still ahead, current valuations undemanding

• On-going efforts to enhance shareholder value

• Incubating start-ups with future monetisation potential

• Maintain BUY with TP of RM3.94 Investor conference at RedQ. AirAsia held its inaugural Global Investor Day at its RedQ which was attended by well over 50 analysts, fund managers and market participants. Representing the company were most of the Group’s senior management personnel, from both its local and foreign operations. Tan Sri Dr. Tony Fernandes, Founder and Group CEO gave a keynote speech, which was followed by a presentation by the Group’s Chief Digital Officer on the Group’s digital initiatives.

Keeping costs low had been AirAsia’s main narrative. Tony reminded participants of AirAsia’s immense growth, transforming itself from humble beginnings into a dominant low-cost carrier (LCC) in the region. The carrier’s fixation on keeping itself lean, without compromising safety and service quality had been one of its mainstays in weathering numerous challenges in a cyclical industry (including being short sold on to an intraday low of 76 sen in 2015).

AirAsia’s best days are still ahead. The company aims to more than double its fleet size from 204 as at end-FY17F to 500 over the next 10 years. Besides the Asean region, it aims to make India, China, Japan and Vietnam its next growth areas. In our view, AirAsia’s prospects do appear promising, with the population of Asean+China+India of 3.3b with an average of 0.3 flights per capita offering large potential. This is in contrast to developed markets such as North America (population: 357m, flights per capita: 2.5) and the European Union (population: 509m, flights per capita: 1.3).

Underappreciated in terms of valuation. AirAsia’s stock currently trades at an undemanding price-to-earnings ratio of 8x FY18F earnings, a discount compared to its much larger European peers, Ryanair and EasyJet (15x and 20x trailing earnings respectively). While we concur with Tony that AirAsia is indeed undervalued, we do not foresee the company trading on par with European LCCs. Instead, our target price of RM3.94 is pegged to 10x FY18 earnings, closer to its Asean LCC peers.

Good progress in enhancing shareholder value. We opine that the company’s efforts in monetising its investment assets and streamlining its group structure would be positive to its share price. The company has been active on both fronts – 1) announcing its divestment of its 50% stake in the Asian Aviation Centre of Excellence Sdn Bhd (AACOE) for US$100m and reiterating that it is close to divesting AirAsia Expedia and Asia Aviation Capital; 2) announcing the listings of IAA and PAA on their respective stock exchanges. The listings of IAA and PAA, targeted to complete by FY18, could pave the way for relaxation of foreign shareholding restrictions. This would bring AirAsia closer to creating a single Asean airline (similar to Ryanair and EasyJet).

A matured airline with a start-up culture. Being close to divesting some of its earlier investments, AirAsia continues to build new businesses that complement its core airline operations and create future monetisation opportunities. On the digital front, AirAsia is creating software with data analytic capabilities to better utilise the vast amounts of data it collects on its website and mobile application. The aim of this software would be to increase the conversion rate of it website visits into actual sales. Aside from that, AirAsia will soon allow its customers to purchase tickets, ancillary products and duty free items using major mobile wallets platforms, in addition to launching its own mobile wallet, BigPay. The mobile wallet system would also complement its soon to be launched digital menu, which will be offered on-board flights. Other notable ventures that could provide monetisation opportunities include Rokki (e-commerce platform), travel3sixty (trip advice and booking platform), Ground Team Red (ground handling) and Red Cargo (air cargo services). We have yet to impute any incremental revenue and earnings from its digital initiatives, which we believe are in the nascent stage.

Maintain BUY with unchanged TP of RM3.94. AirAsia remains our top pick in the aviation space, as a company that creates shareholder value through monetising its investments and issuing special dividends. In addition, the company continues to reinvent itself, introducing new digital offerings in order to stay relevant in a highly competitive industry. Our TP derived from a forward price-to-earnings ratio of 10x FY18 EPS.

Source: MIDF Research - 6 Oct 2017