Flight QZ8501 lost contact with traffic control on 28 Dec, and we extend our deepest condolences and prayers to the victims, their families and friends.  Maintain  BUY,  with  a  MYR3.47  TP  based  on  12x  FY15  EPS (18.1%  upside).  The  risk  to  earnings  is  the  cap  on  yield  upsi de  as  it attempts  to  stimulate  passenger  demand,  although  we  think  it  is unlikely to affect yields significantly as they are at rock bottom levels.

#Pray for QZ8501.  Flight QZ8501  lost contact with the traffic control on 28  Dec.  The  aircraft  is  part of  Indonesia  AirAsia’s  (IAA)  fleet,  which in turn is Malaysia AirAsia’s (MAA) associate with a 49% stake. Search and rescue operations are being conducted.  We are saddened by this tragic incident. Our  deepest condolences  and prayers for the souls on board, as  well  as  their  families  and  friends.  The  AirAsia  Group  had  an untarnished record on flight safety. The aircraft for flight QZ8501 was just six  years  old  and  had  undergone  its  routine  maintenance  check  in November. The captain in command had a total of 20,537 flying hours, of which  6,100  flying  hours  were  with  IAA  on  the  Airbus  A320.  The  first office officer had a total of 2,275 flying hours with IAA.

Assessing yield downside.  Risks to earnings arising from this incident are  that this could cap the yield upside expectations. Although this will likely  be  more  pronounced  for  IAA,  we  do  not  rule  out  that  this  could possibly impact yields for the whole AirAsia group, notably MAA. A 2.5% reduction  from  our  base  case  on  the  underlying  yields  for  FY15 (assuming load factor stays unchanged) would reduce FY15 earnings by 6%.  But  with  yields  already  at  rock  bottom  levels  as  a  result  of  MAS’irrational  pricing  strategy,  we  estimate  that  MAA’s  downside  in  yields would not be hard hit. However, this unfortunate tragedy could  mean the risk  of  higher  losses  for  IAA.  We  currently  forecast  MYR30m  share  of losses from IAA  in FY15  (from  the total of  MYR100m  in  losses expected in  FY14).  As  of  9M14,  IAA  recorded associate  share  of  losses of MYR108.3m  –  which were mostly from 1HY14  as the carrier posted marginal profit in 3Q14.  After its route restructuring recently (where loss making routes are cut), yields in 3Q have been strong (+21% YoY). As a worst-case scenario, assuming FY15 share of losses from IAA magnifies to  MYR90m  from  our  MYR30m  forecast,  with  our  key  assumptions  on MAA unchanged, this could shed our TP to MYR3.21 (from MYR3.47) as earnings are reduced by 7.5%. 

Maintain BUY at  a TP of MYR3.47  based on 12x FY15 EPS.  The likely dip  in share price presents an opportunity to   accumulate. With the stock widely held by institutional funds,  we foresee  any  price  weakness  from this tragedy to follow through with a rebound. 

Source: RHB