AirAsia  has  ordered  aircraft engines  worth  a total  of  USD8.6bn (at list price)  to  be  delivered progressively until 2026, reaffirming  its ongoing fleet  expansion  plans.  On  a  separate  note,  its  Japan  JV  will  likely  be terminated  due to  management differences with partner  ANA. We deem the termination as a positive to stop further cash burn. Maintain BUY on AirAsia, with an unchanged FV of MYR3.94, premised on a 13x P/E.

- Ordering  engines.  AirAsia  has  placed  a  large  order  with  CFM International Inc (CFM) for CFM engines  to power  64 A320  new engine option (NEO)  aircraft and 36 A320  current engine option (CEO)  aircraft, along  with  five  spare  engines  for  CEOs  and  nine  spare  engines  for NEOs. The order, which amounts to USD8.6bn at list price,   includes  a 20-year guaranteed  maintenance agreement.  Given the massive size of the order, we reckon the  discounts could be substantial.  The  purchase confirms  AirAsia’s  ongoing fleet expansion plans, as it aims  to retire  the first  aircraft  from  its  current  fleet  sometime  in  2016  and  starts  fleet replacement  by  2020.  This  will  enable  the  low-cost  carrier  (LCC)  to maintain  a  young  fleet,  which  will  ultimately  lead  to  cost  savings  from lower maintenance charges and improved fuel burn. 

- Japan  JV  likely to be terminated.    AirAsia group chief executive  Tan Sri Tony Fernandes hinted on the high likelihood  that  the Group’s  Japan AirAsia  JV  would  be  terminated  due  to  management  difference  with airline partner  ANA Holdings Inc  (ANA; Not Rated), parent of All Nippon Airways.  The  AirAsia Japan  brand name will  also be pulled out. We are positive  on  this  new  development  as  the  termination  would  reduce potential cash burn  from  its  JV with  ANA.  Meanwhile, AirAsia is said to be  seeking  a  new  JV  partner,  which  would  likely  be  from the  financial services sector.

- Maintain BUY. We raise our FY13 / FY14 / FY15 earnings by 2% / 21% /  18%  after  removing  its  Japan  associate  from  our  calculations,  on assumption  that  the  JV  will  be  terminated  this  year  and  thus  reduce losses moving forward.  We have also  incorporated  losses of MYR30m and  MYR20m  for  FY14  and  FY25  from  its  Indian  operations.  Maintain BUY, with our FV unchanged at MYR3.94, premised on 13x FY14 P/E.

Source: RHB