INVESTMENT HIGHLIGHTS

• Boeing 737 MAX 8 saw its second incident within less than a year after Ethiopian Airlines tragedy last Sunday

• Some ASEAN peers are operating with the Boeing 737 MAX 8

• AAGB does not operate any Boeing aircraft under its fleet

• Temporary sentiment in air travel may prompt a shift towards flight operated under AAGB especially in Indonesia

• Maintain BUY with unchanged target price of RM3.40 per share

Second tragedy involving Boeing 737 MAX 8 in less than a year. On 10 March 2019, an Ethiopian Airlines flight from Addis Ababa heading for Nairobi crashed six minutes after take-off, killing 157 people on board. The plane that was flown by the airline was the Boeing 737 MAX 8, the same model that was involved in a tragedy less than five months ago when a Lion Air flight crashed into the Karawang Waters in West Java.

ASEAN airlines using Boeing 737 MAX 8. According to Boeing’s website, some of the South East Asian airlines that operate the Boeing 737 MAX 8 are Silk Air, Garuda Indonesia and Lion Air. Following the tragedy of Ethiopian Airlines, the Transportation Ministry in Indonesia decided to ground all Boeing 737 MAX 8 aircraft in Indonesia pending airworthiness inspection. So far, Garuda Indonesia has held additional inspections for its Boeing 737 Max 8 fleet with no fault found but will continue to conduct additional inspections of several systems that are suspected to be the main cause of the accident.

AAGB’s current fleet has no Boeing aircraft. Even if the overall inspections on Indonesian carriers operating Boeing 737 MAX 8 did not result in any fault discovered, we opine that sentiment to fly on airlines with that particular aircraft could be affected in the short term. AAGB’s current fleet of more than 100 aircraft does not include any aircraft from Boeing but instead operates Airbus aircraft. With this, we do not discount the possibility of a temporary shift in Indonesian passengers to opt for flights under AAGB.

Maintain BUY with unchanged TP of RM3.40 per share, pegging its FY19 EPS to PER of 10x. It is notable that AAGB is trailing at a PER of 4.6x, while its Asian peers are approximately trading at a PER above 10x which we opine is unwarranted given the group’s position as the leading ASEAN low cost carrier. The possible shift of passengers to AAGB due to its absence of Boeing fleet could further sustain the load factor of the group to remain above 80%. We continue to like Air Asia as the company continues to enhance its cost structure, along with its efforts of rationalising revenue and cost via digitalisation efforts. We also believe that the headwind from oil prices will be moderated by AAGB hedging policies. Overall, we believe the prospect of AirAsia remains sanguine predicated on: 1) stable demand growth with average ASK expansion of 14% in FY18; and 2) resilient load factor despite volatile fuel price.

Source: MIDF Research - 12 Mar 2019