Review

• Excluding all exceptional items and putting back profit from associates (with deficit shareholders’ funds), AirAsia’s FY16 adjusted core profit of RM1.55bn came in within market expectations.

• Malaysia (MAA) – pushing load to its limit (see Chart 3 & 4). 4Q16 load factor marched higher to 86% from 84% in 4Q15 (89% in 3Q16). The strong YoY performance was underpinned by higher demand or RPK growth (8%), aided by higher capacity, ASK (6%). The spread between RASK (15.7sen/ASK) and CASK (11.7sen/ASK) narrowed by 51.3% to 4sen/ASK as the group continued pushing for load at the expenses of airfare. Moving forward, management said the same strategy will be adopted, i.e.: to push load higher with lower fares.

• Thailand (TAA) – a bit of stress (see Chart 5 & 6). 4Q16 load remained at satisfactory 81% level (vs 82% in 4Q15) with ASK growing at a faster pace of 8% than RPK’s 6%. However, we see some stress in terms of growth in RASK in 2017 due to intensifying competition. In local currency, TAA reported 60% YoY drop in adjusted PAT (exc. forex) in 4Q16.

• Indonesia (IAA) – Strong turnaround (see Chart 7 & 8). 4Q16 seen the same trend as of previous quarters, where both ASK and RPK dropped substantially YoY as IAA was undergoing route restructuring. This has pushed up the 4Q16 load factor to 83% (vs 80% in 4Q15). 4Q16 RASK increased 5.8% while CASK dropped 4.1%, leading to strong turnaround in PAT (exc. forex) to IDR57tn in 4Q16 vs a loss of IDR45tn in 4Q15.

• Overall, FY16 earnings were commendable with higher contribution from all operating units. This includes AirAsia Philippines (PAA) and AirAsia India, which reported lower losses YoY.

Impact

• We raise our 17-18 earnings projections by 8.1% and 6.2% respectively after incorporating the new fleet assumptions and the unaudited FY16 earnings into forecasts.

Outlook

• In the conference call, management provided further guidance on the several proposals highlighted in the previous results conference call; i.e.: disposal of AAC, listing of IAA and PAA. For AAC disposal, a formal bid worth US$1bn is expected to come in late-March for the board to decide and relevant announcements will be made in May-June. If everything goes as planned, the company is expected to receive the disposal proceeds in 3Q17. As far as IAA and PAA’s IPOs are concerned, management is confidence that the listing will take place in 2Q17.

• In terms of fleet expansion, AirAsia will take delivery of 30 new aircraft of which 8 aircraft will be allocated to MAA, 6 to TAA, 2 to IAA and the balance to AAI (6), PAA (5) and AirAsia Japan (3). As such, management guided that MAA’s capacity is expected to increase by 10%. We are positive on the fleet expansion in view of the current strong demand, which pushes the load factor to above 80%.
• For 1Q17 forward booking, all operating units has received high load of more than 80%, i.e.: MAA – 89%, TAA – 87%, IAA – 82%, PAA – 92% and AAI – 89%.
• To mitigate the impact of surging fuel price, the company has hedged 75% of fuel requirement at US$60/bl. Note that this figure would drop when the company takes delivery of new aircraft.

Valuation

• Given the change in earnings, we raise AirAsia’s target price at RM3.02 based on unchanged 9x CY17 EPS. Maintain Hold on AirAsia.

Source: TA Research - 24 Feb 2017