The  oil  price  slump  should  benefit  the  aviation  sector.  Maintain  BUY with a higher MYR3.47 TP (from MYR3.11, 24% upside).  We upgrade the sector to OVERWEIGHT (from Neutral) and raise FY15 earnings by 30% for AirAsia, which is our Top Pick for the local aviation sector. While we do  not  see  demand  growing  strongly,  sector  earnings  will  likely  be underpinned by yield recovery coupled with lower jet fuel prices.  
 
Oil  price  slump gives earnings boost. The slump in oil prices  should benefit  the  aviation  sector.  While  we  do  not  see  demand  growing strongly,  sector  earnings  will  be  underpinned  by the  recovery  in  yields, with  additional  positive  impact  from  lower  jet  fuel  prices.  Given  that  jet fuel accounts for 45.3% of AirAsia’s FY15F operating costs, the lower jet fuel price assumptions could have a positive impact on its earnings.  

Lifting earnings forecasts. We lower jet fuel price to USD107.20/barrel (bbl)  in  FY15  (from  USD115/bbl)  and  USD120.5/bbl  in  FY16  (from USD123/bbl).  This  subsequently  raises  our  earnings  estimates  for AirAsia  by  30%  in  FY15  and  1% in  FY16.  The  carrier’s sensitivity to a USD1/bbl change  could impact earnings by 2.3-2.3% in both FY15 and FY16, or approximately MYR18.4m-19.2m. 

Maintain  BUY,  our  aviation  sector  Top  Pick.  Post-earnings  revision, we raise AirAsia’s TP  to MYR3.47 (from MYR3.11). However, we lower our target P/E to 12x (from 14x). This is in line with consensus upgrades on peer  comparables,  which had lowered the FY15 sector P/E multiple. We still prefer AirAsia for its compelling valuations and thrifty operating structure. The stock remains our sector Top Pick. It has outperformed in the recent oil price slump and could enjoy an earnings upside should oil prices remain depressed for a protracted period. 

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Financial Exhibits

SWOT Analysis

Company Profile

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

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Source: RHB