Although  AIRA’s  9M13  core  earnings  were  9.1%  lower  YTD,  the numbers  are  still  impressive  despite  pressure  on  yields  and  profits amid  intense  competition.  9M13  EBITDA  rose  2.8%,  thanks  to  its prudent cost controls. With KLIA2  due to open  next year, we  may  see further cost reductions.  We upgrade earnings by 1-3% for FY13-15 and maintain our BUY call, at a higher MYR3.70 FV, based on 12x FY14 EPS.

• Impressive!  AIRA’s 3Q13 core earnings of MYR154m (y-o-y:  -6.5%, qo-q:  +33.1%)  beat  our  estimate  of  MYR129m  (link)  and  impressed consensus,  especially  following  MAS’  (MAS  MK,  SELL,  FV:  MYR0.30) disappointing results. This brought its 9M13 core net profit  to MYR411m, down  by  only  9.1%  y-o-y.  Despite  stiff  competition  and  weaker  yield (narrowing  by  3.6%  YTD),  AIRA’s  EBITDA  still  grew  2.8%  YTD  as margins  held  firmly  at  30%,  boosting  its  cash  flow  from  operations  by MYR250m in 3Q13. AIRA also achieved  lower  unit costs (YTD: -1.5% yo-y)  despite  the  higher  jet  fuel  price  YTD  owing  to  its  prudent  cost controls,  notably  due  to  lower  staff  costs  q-o-q  and  y-o-y,  as  well  as lower  fuel  burn.  Meanwhile,  its  associates’  earnings  were  also  better than  expected  as  losses  from  the  Philippine  unit  came  in  lower  than expected,  with  Expedia’s  profits  improving  following  a  management change. The  only  disappointment  was  Indonesia AirAsia, which  posted lower profits due to the weakening IDR.
• Briefing  takeaways.  The  low  cost  carrier  should  realize  further  cost savings  once  KLIA2  begins  operation, especially in the areas of  ground handling, reduced fuel burn and the passenger check-in system. This will help  bring  down  overall unit costs further.  In the  ancillary  segment,  the carrier’s  high-flyer  program  and  fly-thru  pairing  system  attracted  good take-ups.  AIRA  will  also  focus  on  building  new  hubs,  such  as  in  Kota Bharu  and  Penang,  which  have  recorded  better  than  expected  loads. Philippines AirAsia is also expected to break even next year.
• Our top BUY.  We lift our  FY13/14/15 earnings  forecasts  by 3%/2%/1% respectively in anticipation of  costs coming down further. AIRA,  our  Top aviation Pick, is  now  at a  higher MYR3.70  FV  (vs  MYR3.63),  pegged  to 12x FY14 P/E. Including  the market cap of its listed entities and valuing its Indonesia unit at 10x, the Malaysian unit’s P/E is only 6x FY14.

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SWOT Analysis

Company Profile
AirAsia is Asia's leading low cost carrier with operating hubs in Thailand, Indonesia and the Philippines.

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Source: RHB