KUALA LUMPUR: CIMB Equities Research is retaining its target price of RM3.13 for AirAsia after a stunning 1Q16 group core net profit of RM429mil (US$106mil), which was at the higher end of its RM350mil to RM450mil preview and a turnaround from losses last year.
At RM3.13, this was 47.6% above the last traded price of RM2.12, the research house said on Friday. The target price was based on CY17 price-to-earnings (P/E) of eight times (peer range of six to 12 times)
“The group’s airlines universally reported stronger loads and higher revenue per available seat-kilometre (RASK) and, when combined with lower oil prices and a weaker US$, record profits were delivered.
“We stay Add as robust fundamentals should persist into 2Q at the very least and on upcoming consensus forecast upgrades. Our own EPS forecasts are unchanged,” it said.
CIMB Research said AirAsia’s group earnings turned around from losses last year to huge profits this year on the combined powerful tailwinds of lower oil prices, weaker US$, strong short-haul demand across Southeast Asia, higher loads and higher RASK.
Incremental competition was muted all through Malaysia, Thailand, Indonesia and the Philippines while more inbound Chinese tourists played a key role in increasing international flows.
“Apart from Malaysia AirAsia (MAA), Thai AirAsia (TAA) was the star performer, reporting an 85% on-year jump in core earnings. Indonesia AirAsia (IAA) and AirAsia Philippines (AAP) reported substantially lower losses, in line with expectations,” it said.
The research house said the outlook for MAA and TAA was expected to remain robust into 2Q at the very least
“Our analysis of the industry seat deployments in Malaysia and Thailand suggests that capacity growth will be muted entering 2H16, suggesting that the yield recoveries seen throughout the AirAsia group will be extended into at least the 2Q and stretching into 3Q. As a result, the group will continue to deliver strong quarterly earnings,” it said.
The research house said the AirAsia group was 75% hedged for the remaining quarters of FY16 at an average jet fuel strike price of US$75 a barrel.
AirAsia will not be taking further hedges for this year but has opted to extend its hedges into next year, currently at 30% of 1Q17’s and 20% of 2Q17’s requirements with an average strike of US$57-58/bbl. This position will be built up further and will give AirAsia excellent cost protection at record low oil prices.
“Our full-year group core net profit forecast of RM1.3bn (US$327m) for FY16 is only three times the RM429m core earnings reported for 1Q16. We have opted for a more conservative forecast as record airline profits may encourage additional capacity deployment by Malindo, which has so far not taken any additional aircraft this year, and also by Thai Lion Air, which slowed down the pace of its fleet additions recently.
“There was an increase in 1Q16 staff costs on higher pilot salaries due to pilot shortage and higher maintenance costs on the back of a greater number of leased planes andoverall fleet ageing. The Malaysian DCA doubled air navigation charges in mid-April2016 and more increases could follow.
“Finally, we believe MAHB will be allowed to hike klia2 airport taxes in FY17, which may have a small impact on AirAsia’s yields. Still, these factors should not stop the group from reporting record profits in FY16 and FY17,” it said.
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