• There are concerns that the outbreak of coronavirus (2019-nCoV) in Wuhan, China, may hurt earnings of travel/tourism related stocks, including AirAsia. Our analysis shows that AirAsia’s performance was surprisingly resilient during the past pandemics, i.e. SARS (2003), H1N1 (2009), Ebola (2014) and Zika (2016).

• We notice that the impact of these pandemics to the global air travel sector was relatively short-term in nature and it was barely noticeable on a full-year basis (as traffic recovered strongly after the pandemics) (see Exhibit 1 for the global air passenger traffic).

• Zooming in on AirAsia (Exhibit 2 and 3), it actually showed annual passenger growth even during the past pandemics. The impact of these pandemics, at most, only lasted for 1-2 quarters.

• As such, for now, we do not see the need to cut our FY20F traffic growth rate assumption of 15% (vs. 19% yoy for 9MFY19) and earnings forecasts for AirAsia.

• We maintain our SELL call for AirAsia for different reasons. The positive outlook for Malaysia’s tourist arrivals (ahead of the Visit Malaysia Year 2020) should serve as a tailwind to AirAsia’s key strategy to aggressively grow its top line. However, this is offset by AirAsia’s higher cost structure following the sale-and-leaseback of its fleet (which mean its planes are now largely leased vs. owned previously).

• We value AirAsia at RM1.40 based on 8x FY21F EPS, a 30% discount to its much larger global peers (Rynair and Southwest Airlines) with an average forward PE of about 11x to reflect AirAsia’s relatively smaller size.

Source: AmInvest Research - 23 Jan 2020