1Q15 core earnings missed forecasts, prompting us to cut FY15-17Fearnings by 10-15%. Maintain BUY with a lower MYR2.93 TP (from MYR3.45, 41% upside) premised on an unchanged 12x FY15 EPS. The setback was due to the tragic QZ8501 incident, which consequently hurt yields and load factor. We project earnings to sequentially improve as we expect lower jet fuel price ahead and a recovery in passenger traffic.

• A miss. 1Q15’s MYR84.8m core earnings (+105% YoY, -44% QoQ) missed our/consensus forecasts, accounting for 11% of FY15 estimates. The disappointment came from weaker-than-expected topline as yields deteriorated (-7% YoY vs our full-year -1% forecast) due to the ongoing competitive landscape, compounded by a drop in load factor (by 5.2ppts to 75.4%) following the tragic QZ8501 incident as marketing campaigns were halted. Operating cash flow improved YoY to MYR209m (1Q14: MYR79m). Given the weaker numbers, we trim load factor and yields further (see Figure 2) and cut our FY15F-17F earnings by 10-15%.
• Briefing highlights. Malaysia Airlines’ (MAS) capacity cut remains a key wild card as this will remove irrational pricing on air fares. Until this is known, AirAsia is still toying with capacity growth in FY15. We estimate seat capacity to grow by 9% in FY15. Management also pointed out that Malaysia’s forward load factor in 2Q15 has recovered to 80% (flat YoY)and is up 2ppts to 79% in 3Q15. While its associates – Indonesia AirAsia (IAA) and Philippines AirAsia (PAA) are still in losses, a profitability turnaround is expected in 3Q15 on the back of higher average base fares. However, we still project losses of MYR100m/MYR15m in FY15from these two associates respectively. IPOs are planned for IAA (2017)and PAA (2018). Half of the cash obtained from the pre-IPO fundraising will be used to pare their borrowings (from aircraft leases) owed to AirAsia, who did not disclose who the potential pre-IPO investors are.
• Outlook. Looking ahead, AirAsia’s effective jet fuel price (including hedging position) based on YTD jet fuel spot price is expected to be 4.6% lower vs 1Q15 levels, given the higher fuel price it had hedged for 1Q15 earlier. This should further reduce costs moving forward. Coupled with improving yields and load factor ahead, we expect earnings to sequentially improve.
• Maintain BUY. We reiterate our BUY call with a lower MYR2.93 TP(from MYR3.45) following the earnings cut. Our TP is still based on 12x FY15 P/E, in line with the regional low-cost peers. Valuation remains attractive at 8.5x FY15 P/E, with a dividend yield of 3.2%.