AIRA  posted  an  11%  y-o-y  increase  in  3Q13  passenger  numbers  with load  factor  unchanged,  but  we  expect  9M13  core  earnings  to  fall  12% YTD on yield erosion. Thus, we revise our FY13F/15F earnings lower by 2%/3%.  However,  as  overall  profitability  improves  in  FY14,  AIRA remains a BUY but at a lower FV of MYR3.63 (from MYR3.94).  

- Operating  stats  to  stay  firm.  AIRA’s  3Q13  operating  statistics  were decent with passenger and revenue passenger kilometre (RPK) growing 11%  y-o-y  (YTD:  +10%)  while  load  factor  remained  unchanged  at  77% (YTD: +78%). We note that the carrier is lowering its airfares to sustain these loads to raise awareness and stimulate demand. Thus, we expect yields to drop by 4%/1%/2% for FY13F/14F/15F, attributed to intensifying competition  from  Malindo  Air  and  Malaysian  Airline  System  (MAS  MK, NEUTRAL, FV: MYR0.34).

- 3Q13  results  preview.  We  expect  AIRA  to  report  3Q13  revenue, EBITDA  and  core  earnings  of  MYR1.28bn,  MYR373m  and  MYR129m respectively.  As  yields  will  continue  to  be  under  pressure,  its  9M13 earnings  are  expected  to  decline  by  12%  YTD,  accounting  for  58%  of FY13 forecasts (9M12: 60%). Yields in 3Q13 are expected to pick up q-o-q, but will drop 8% y-o-y on the challenging landscape (see Figure 2).  

- Revising forecasts. We notably tweak our earnings estimates on lower jet fuel assumptions, as we had earlier projected a conservative jet fuel cost  of  USD135  per  barrel  for  FY13F-15F  vs  the  YTD  average  of USD122  per  barrel currently.  We also  assume higher  advertising  costs. Accordingly,  our  FY13/15  earnings  forecasts  are  lowered  by  2%/3% respectively while FY14 earnings remain unchanged.  

- Maintain  BUY.  FY14  is  expected  to  be  a  better  year  as  earnings  from associates  improves  and  the  listing  of  Indonesia  AirAsia  to  crystallise valuations.  We  maintain  our  BUY  call  but  reduce  our  FV  to  MYR3.63 (from  MYR3.94),  premised  on  12x  FY14F  P/E  (from  13x  FY14F  P/E). Currently  trading  at  8.4x  FY14F  P/E,  it  is  still  cheaper  than  the  9.6x FY14F P/E average of its Asian peers and 11.4x FY14F P/E of its global peers  (see  Figure  3).  Incorporating  the  current  market  cap  of  its  listed entities,  and  valuing  its  Indonesia  operations  at  14x,  AIRA’s Malaysian operation is valued at 5.7x FY14 P/E (see Figure 4).

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AirAsia is Asia's leading low cost carrier with operating hubs in Thailand, Indonesia, Philippines and Japan

Source: RHB