We remain upbeat on AirAsia (AA), with our FV of RM3.39 and BUY call intact. Recent updates from management and channel checks suggest that load factors and yields to routes that compete with Malindo’s remain at healthy levels. Overall traffic is expected to grow by doubledigit in 1Q and could expand more as the recent negative press on Lion Air’s aircraft crash evoked concerns on Malindo’s safety among the public.

Maintain BUY. FV intact at RM3.39. This is premised on 11x FY13 EPS. AA is currently trading at 9x P/E, attractively low compared to its regional peers’ average of 12x and its own historical average of 10x. Taking into account the market cap of the listed entities it has stakes in, AA is trading at a much attractive valuation of 8x FY13 P/E. The IPOs of AirAsia X (AAX) and Indonesia AirAsia (IAA) will further crystalize its valuation.

Malindo not much impact. According to our channel checks, load factors to both Kota Kinabalu and Kuching routes – also served by its new competitor Malindo – remain strong. AA has not lowered airfares to compete head on with Malindo. This suggests that earnings expectations could potentially surprise on the upside as impact to yields would not be as much as we had earlier anticipated. On the other hand, we noticed that MAS has been reducing its airfares to these routes.

Still growing by double-digits. We expect AA’s 1Q 2013 passenger traffic to remain fairly resilient, maintaining its double-digit growth in both available seat kilometers (ASK) and revenue passenger kilometers (RPK). Yields will continue to inch higher y-o-y on the back of stronger ancillary income and new routes.

One man’s loss is another man’s gain. The negative press over the weekend on Lion Air’s aircraft crashing into the sea will likely impact the public’s perception on the safety of Malindo’s aircraft and the reliability of its pilots. We see this as a positive for AA given its zero crash track record profile. Furthermore, Malindo’s application to start turbo props operations in Subang Airport could possibly be put on hold by the Department of Civil Aviation (DCA).

Source: RHB