Executive summary

• For 2017, we look forward to 4 driving factors, i.e.: asset disposals; new shipping alliance; jet fuel price; and ringgit movement to influence stock performance.

• We expect the disposal of Asia Aviation Capital by AirAsia to materialise in 1Q17. All the non-binding offers will be presented to the board and due diligence process will begin on 5 December.

• Tiong Nam’s REIT plan would materialise too. Assuming 80% of the net book value of PPE (RM862mn) to be the IPO size, this would be sufficient to pay off the total debts of RM660mn as at Sep-16.

• Referring to Ocean Alliance’s Day One Network, Port Klang will be called for services. However, we are unsure about the transshipment volume that would come to Westports.

• The crude oil price is likely to recover after OPEC members reaching agreements to reduce output. The increase in crude oil price, which will lead to higher jet fuel cost, will likely reduce AirAsia’s future earnings.

• In our sensitivity analysis, AirAsia group’s FY17 earnings would drop 2.9% or RM33mn for every US$1 increase in jet fuel and without cost pass through. However, the company would have some buffers after hedging 74% of fuel requirement at US$60/bbl.

• Ringgit depreciation is negative to AirAsia’s earnings too due to USD denominated borrowings. It is also a bane of increasing future capital spending for aircraft purchase.

• In our sensitivity analysis, our earnings forecast for AirAsia will reduce by 2.4% (or RM28.4mn) for every 10sen depreciate in ringgit against the dollar, all else unchanged.

• We reduce AirAsia’s FY17-18 earnings by 11.6-14.1% after incorporating our new ringgit and oil price forecast. No change to earnings of Westports, MAHB and Tiong Nam.

• We cut AirAsia’s target price to RM2.79 while maintaining Westports, MAHB and Tiong Nam’s target price at RM4.82, RM6.64 and RM2.03 respectively. We upgrade MAHB to Hold (from Sell) as the stock price dropped 5% since the release of 3Q16 results.

• We downgrade the transportation sector to Neutral (from Overweight previously) due to looming currency risk. We advise investors to stay on the sideline now until the dust settles.

Recommendation

We cut AirAsia’s target price to RM2.79 following the earnings downgrade. Meanwhile, we maintain Westports, MAHB and Tiong Nam’s target price at RM4.82, RM6.64 and RM2.03 respectively. We upgrade MAHB to Hold (from Sell) following the drop in share price of more than 5% since the release of 3Q16 results. We downgrade the transportation sector to Neutral (from Overweight previously) due to looming currency risk, which would deter investor’s confidence. We advise investors to stay on the sideline now until the dust settles.

Source: TA Research - 7 Dec 2016