INVESTMENT HIGHLIGHTS

• AAGB reported net profit of RM1.1b in 1QFY18

• Core net profit was broadly in-line

• Rolling over valuation to FY19

• Maintain BUY with adjusted target price of RM4.87

Core profit was broadly in-line. The group reported 1QFY18 net profit of RM1.1b, whereby there was a significant jump as compared to same period last year due to a stake sale of one of its subsidiary. Excluding the one-off and non-core income items, consolidated core PATAMI came in at RM340.0m. Accordingly, the core profit accounted for 21.2% and 20.7% of full year estimates respectively. Revenue grew strongly by +14.8%yoy, supported by increased ticket sales (+17.0%yoy) and ancillary income (+14.0%yoy) vis-à-vis +16.0%yoy growth to 10.7m in passengers carried in 1QFY18.

Ancillary income expanded. The strong passenger growth had a direct impact to ancillary revenue, which grew by +11.0%yoy to RM505.1m. It is worth noting that ancillary income per pax stood at RM47, a decline of - 6.0%yoy due to in our opinion, more price sensitive passengers in new markets. This was evident by the strong jump in passengers which surpassed the growth of ancillary revenue. Moving forward, we believe the group will be able to improve revenue from the ancillary segment, following its sale-drive initiatives in 1QFY18. This includes the utilization of Artificial Intelligence, offering pricing optimisation while enabling ancillary upsell during check-in and at boarding gates.

Capacity expansion giving pressure to short-term yield. In 1QFY18, RASK declined by -2.0%yoy to 14.68sen. Despite the drop, we believe RASK will likely improve in due course supported by resilient travel demand in the longer term, as few new routes transition to mature phase. Despite the drop, it is important to highlight that CASK was mostly flat in the quarter despite higher aircraft fuel expenses, MRO and operating lease expenses. We opine this as commendable despite the increase of average jet fuel price in 1QFY18 by +9.0%yoy to USD83/brl.

But load factor remained strong. We considered the group had maintained a strong load factor at 87%. Although, this was a slight decline of -2.0ppts from 1QFY17 level, we noted that the group had embarked on bulky capacity expansion via frequencies and number of aircrafts. Given the increase in capacity, management highlighted that it will continue to focus on its load active strategy especially for newly commenced routes. This is done to strengthen its presence in new markets, and capture higher market shares. We believe this move as strategic in the long-term, taking AirAsia a step forward in enhancing its brand name as ASEAN Low Cost Carrier. While load factor remained strong following expansion in new markets, it is worth to note that average fare was flat in comparison to last year, at RM171.00.

Interim dividend of 13sen declared. Its board of directors have approved an interim single-tier dividend of 13sen in FY18, which was in line with our estimates.

Impact to earnings. Given that the core earnings came in line with our forecasts, we will make no adjustments at this juncture.

Maintain BUY with adjusted TP of RM4.87. We adjust our TP higher to RM4.87 (from RM4.80) as we rollover our valuation to FY19. Our TP is based on pegging its FY19 EPS to PER of 10x. Notably, share price has been on a downtrend, attributable to post GE14 effects. It is now trailing at PER of 6.6x, while its ASEAN peers are approximately 10x, which we opine is unwarranted given the group’s position as the leading ASEAN Low Cost Carrier. We believe strong set of results in coming quarters will increase the likelihood for the stock price to recover and rise further. Therefore, at current price level, it represents an opportunity for investors to accumulate. All in, we continue to like Air Asia as the company continues to reinvent itself to maintain its lead in a highly competitive industry. Overall, we believe the prospect of AirAsia remains sanguine predicated on: 1) stable demand growth with consistent yearly ASK expansion; 2) new areas of growth in Air Asia India and Air Asia Japan.

Source: MIDF Research - 25 May 2018