AirAsia (AIRA)’s Malaysia operation posted encouraging 1QFY13 earnings but the overall group’s core earnings softened due to higher losses at its Japan associate. Hence, the numbers slightly missed our forecast. We cut our earnings estimate by 5% for FY13-14, but keep our Buy at a higher MYR3.94 FV, based on 13x FY14 EPS, still at a discount to peers.

Dragged down by associates. AIRA’s Malaysia operations posted encouraging EBITDAR and revenue growth of 8% y-o-y and 11% y-o-y respectively during the seasonally weaker 1Q. We deem the core Malaysian numbers better than anticipated, boosted by an improvement in operating efficiency as unit costs (excluding fuel) improved. However, Japan AirAsia’s rising losses of MYR33.2m weighed down overall group profit, resulting in its combined associate contribution racking up losses of MYR12.5m in spite of the stellar profits from Thai AirAsia. Consequently, AIRA’s core net profit fell 16% y-o-y and 60% q-o-q, coming in slightly below our forecasts as the core 1Q earnings made up only 19% of our full-year estimate vs the 23.2% achieved in1QFY12.

Briefing takeaways: i) AIRA is unfazed by competition from Malindo, which will operate its turbo props from the Subang terminal. We concur with Management that the impact will be felt more by Firefly, ii) Malindo has started scaling back on frequency to Kuching and Kota Kinabalu to minimize losses, which is a positive, iii) losses in Japan attributed to AIRA and its Japanese partner ANA’s differing business strategies. Both parties are now in discussions to reach a resolution, iv) Philippine AirAsia could be profitable as early as 2014 following the tie-up with Zest targeting new routes to China and Korea.

Trimming forecasts. We are trimming our overall earnings by 5% for FY13-14 to include the higher associate losses. However, for its Malaysia operations, we are raising our EBITDA by some 5% for the same period given the improving cost efficiencies, notably workforce productivity.

Buy. AirAsia remains a BUY as the low cost carrier will be unfazed intensifying competition. We are pegging AIRA at a 13x P/E (still below its average Asian LCC peers) from 11x earlier, on its FY14 earnings to derive a FV of MYR3.94. 

Source: RHB