INVESTMENT HIGHLIGHTS

• 5 aircrafts to continue being leased under AACL instead of being transferred to the purchasers

• AAGB still intends to dispose the five aircraft when the time is suitable

• Increase of depreciation charges from the non-transfer of 5 aircrafts to be minimal

• Maintain BUY with unchanged target price of RM3.48 per share

Leasing of remaining 5 aircrafts continue under AACL. AirAsia Group Berhad’s (AAGB) announced that the transfers of aircraft and aircraft engines under the sale and purchase agreement with Herondell, Incline B and FLY (collectively referred to as “purchasers”) have been completed with the exception of five aircrafts which are currently leased to third party airlines (with an estimated enterprise value of USD173.7m) by Asia Aviation Capital Ltd (AACL). These five aircrafts will not be transferred to the purchasers as the agreement has now lapsed. Therefore, only 79 aircrafts have been transferred from the 84 aircrafts agreed under the disposal of AAGB’s aircraft leasing business for USD1.18b.

Our view. In spite of the five aircrafts not being transferred to the purchasers, AAGB still intends to dispose these five aircrafts in the future, according to the management. The fact that 79 aircrafts have already been transferred to the purchasers under the disposal of its aircraft leasing business is a positive sign that AAGB has progressed well in divesting its non-core assets in addition to the proposed sale of 25 aircrafts to Merah Aviation Holding Limited, an indirectly controlled entity of Castlelake L.P.

Impact on earnings. With the five aircrafts still being leased to third party airlines under AACL, we estimate the increase on depreciation charges to be minimal at only 1.4% which will be partially offset by the lease income obtained. As such, we are maintaining our earnings estimates for FY18 and FY19 at this juncture.

Maintain BUY with unchanged TP of RM3.48 per share, pegging its FY19 EPS to PER of 10x. It is notable that AAGB is trailing at a PER below 5.0x while its Asian peers are approximately trading at a PER around 10x which we opine is unwarranted given the group’s position as the leading ASEAN low cost carrier. We believe that its dynamic pricing mechanism will mitigate the effect of having to adhere to the PSC charges which may push average fares higher to sustain margins. We continue to like AAGB as the company continues enhance its cost structure via digitalisation efforts. Overall, we are sanguine on the prospect of AirAsia predicated on: 1) stable demand growth with conservative average ASK expansion of 13.3% so far in FY18; and 2) resilient load factor despite volatile fuel price. While we note that sensitivity of passengers towards increased charges to be low in the past, the possible downward revision in the PSC could be an impetus to further lift load factors.

Source: MIDF Research - 10 Jan 2019