- We reaffirm our HOLD rating on Airasia (AA) at unchanged fair value of RM2.80/share following the release of its 2Q13 results last night.

- The group reported core earnings of RM109mil for its 2Q13, which brought 1H13 core net profit to RM264mil. This accounted for 34% and 30% of our and consensus estimates respectively. We consider the results broadly within our estimates given a seasonally stronger 2H.

- Despite a 5% YoY drop in spot jet fuel price, AA’s core earnings (excluding forex losses, mark-to-market gains and deferred tax) contracted by 22% YoY and is down 13% YTD. Operating parameters seem to have deteriorated with yields falling 12% YTD and loads falling 1.4% YTD.

- AA managed to arrest the load deterioration it saw in 1Q13 (-1% YoY) with 2Q13 load factor registering at 80% levels (flat YoY) on the back of a 13% increase in capacity. However, this came at the expense of yields (-11% YoY). In fact, excluding surcharges, core yields would have been down by 18% YoY (1Q13: -7% YoY).

- The worsening yield trend seems to be the impact ofincreased competition domestically (MAS’ yields were also badly hit in 2Q13, down by 14% YoY) on top of weak underlying yield environment on international routes. As a result, RASK deteriorated further by 6% in 2Q13 following a 0.1% drop in 1Q13. Excluding ancillary income, 2Q13 RASK would have fallen by 11% YoY.

- Indications are that forward loads as well as base fares for 3Q13 are lower than in the prior year, which signals further deterioration in yield and loads on a YoY basis.

- Compounding the impact of deteriorating RASK – 2Q13core CASK (ex-fuel and mark-to-market gains, see Table 2) were in fact up by 4% YoY (YTD: +1.2%). A key driver of the rise in CASK in 2Q13 were staff cost (+16% YoY, +4% QoQ). We are a little concerned on the potentially rising cost of staff retention among local airlines following the entry of new players earlier this year and the influx of capacity into the market.

- The strength in USD is a developing risk for AA as the bulk of cost is denominated in USD. We estimate that every 1% change in our USD assumption will impact FY13-14F earnings by 2%-2.5%. While valuation is decent at 12x FY14F PE relative to peers; increasing earnings risk from a weak currency, a deteriorating yield environment and rising cost, entices us to maintain our HOLD call.

Source: AmeSecurities