INVESTMENT HIGHLIGHTS

• AIRA recorded core net profit of RM375.3m for 9MFY17

• Cumulatively, revenue was up by 41.0%

• Cost-discipline remains key attribute for growth

• Market share strengthens with higher aircraft utilization

• Upward adjustments to FY17 and FY18 earnings

• Maintain BUY with adjusted target price of RM4.02

Above expectations. The group recorded cumulative 9MFY17 core net profit of RM1.1b, which came in above ours and consensus expectations accounting for 85.0% and 82.0% of full year estimates respectively. For 3QFY17, the core net profit came in stronger with +40.7%yoy to RM375.3m. This had lessened the impact of the -33.5%yoy decline in 1QFY17. As a result 9MFY17 earnings came in -23.4%yoy lower. The decline was attributable to the increase in staffs’ cost and marginally higher user charges, due to audit adjustments.

Business continues to be attractive. The group’s 9MFY17 revenue was up by +41.1%yoy, to RM7.1b. The commendable growth a result of higher passengers carried in 3QFY17, recorded at 9.9m with growth of +12.0%yoy. This translates to better ancillary income in the quarter, which saw improvements in baggage (+10.0%yoy), cargo (+15.0%), seat selection (+8.0%) and inflight F&B (+6.0%). Notably, baggage fees represent 49.0% of the total ancillary revenue. In addition to passenger growth, the expansion in ancillary income was also due to its effective dynamic pricing, which was made possible by its huge customer database. Management highlighted that Air Asia managed to achieve comfortable margin, with EBIT margin at 20.0%.

Strong focus to drive opex lower. The management remains focus to lower its overall opex, by leveraging on its large-scale service automation for its customers. We opine the positive effects expected to be gradual, coming from various airports as well as cost initiatives in the coming quarters. Taking into account ancillary income’s margin of ~50.0%, the management is committed in using Artificial Intelligence (“AI”) to drive ancillary income. Further clarity on this initiative will be obtained in 4QFY17.

…while expanding its ASEAN presence. In 2018, the group will see a net addition of 36 aircrafts to its existing capacity. We opine this will lend further growth to its earnings, as it strengthen and expand its market share. The group saw positive progression of its market share in Malaysia, Thailand and Philippines operation with Malaysia recording the highest at 54%. While further capacity addition is expected, higher aircraft utilization by +10.0% in 3QFY17, would bode well with the growing travel demand towards year end. In terms of opex, CASK which stood at 12.8sen in 3QFY17 is anticipated to improve following the increase in aircraft utilization.

Update on flying activities to Denpasar. The Bali volcano has resulted in disruptions to hundreds of flights there, including Air Asia. As a result of this, 4 aircrafts have been redeployed from Denpasar to Jakarta, Medan, Kuala Lumpur and Surabaya to serve other routes until volcano activities settle. It was noted that the impact to be immaterial to the overall group’s opex as Bali only contributes 8.0% of the Consolidated Group’s total ASK. We believe the impact to earnings would be minimal, as the aircraft redeployment will add further support to the growing travel activities to these destinations in the incoming holiday month of December.

Impact to earnings. As the result came in above our expectation, we are revising our earnings forecast for FY17 and FY18 upwards by 9.0% and 3.0% respectively. This is taking into account the increase in passengers carried and the expectation of opex improving further, which will translate to better earnings.

Maintain BUY with adjusted TP of RM4.02. Following our earnings adjustments for FY18, we adjust our TP higher to RM4.02 (from RM3.94) pegging its FY18 EPS to PER of 10x. We like Air Asia because of the company continuous efforts to reinvent itself, introducing new digital offerings to ensure that it stays relevant in a highly competitive industry. Air Asia remains our top pick for the aviation sector predicated on: 1) stable demand growth with conservative ASK expansion of +10.0%; 2) new areas of growth in Air Asia India and Air Asia Japan.

Source: MIDF Research - 30 Nov 2017