CIMB Research retains Hold for AirAsia but slashes target price

AirAsia planes seen here on the KLIA tarmac. – Reuters

KUALA LUMPUR: CIMB Equities Research is maintaining its Hold call on AirAsia but slashed its target price to RM2.72, based on a lower CY20F P/E of 10 times (sector average), from CY19F P/E of 12 times previously.

"In our view, AirAsia may struggle to fully pass on the mix of higher oil prices, stronger US$ and rising airport taxes, leading to margin pressure," it said on Thursday.

It said its target price incorporates an expected dividend payment amounting to 91 sen a share. Of this, 84 sen a share is expected to come from the sale of 84 aircraft and 14 engines to BBAM LLC, which is almost completed barring five more aircraft sales.

During the Budget 2019 announcement on Nov 2, the Minister of Finance said that the government will impose a new departure levy for all outbound travellers by air starting June 1, 2019, with the rate at RM20 per pax for outbound travellers to Asean countries and RM40 per pax to countries other than Asean.

Meanwhile, Malaysia Airports Holdings Bhd (MAHB) will likely be given permission by Malaysian Aviation Commission (Mavcom) to raise the passenger service charge (PSC)  rates by at least 16% from July 1, 2019F, according to MAVCOM’s second consultation paper.

“Altogether, the Asean PSC may be raised by 74% or RM26 per pax, while the non-Asean PSC may be hiked by 71%, or RM52 per pax, in our view. 

“We also believe LCCs with price sensitive customers may struggle to pass on these rate increases in full without hurting demand and if AirAsia subsidises these rate hikes, our earnings forecasts may be lower than expected. 

“Our forecasts assume that AirAsia will pass on these rate hikes without affecting load factors, hence our forecasts have downside risk,” it said.

CIMB Research also said AirAsia may be liable to pay a part of PSC out of its own pocket.

MAHB began billing AirAsia a PSC of RM73 per pax for non-Asean departures from July 1,  2018, but AirAsia has continued to collect only RM50 each from its passengers. 

“We think MAHB’s legal case looks strong, and AirAsia may have to fork out RM52mil to MAHB out of its own pocket for 2H18F, c.4% of our FY18F core net profit estimate excluding this item. 

“The longer AirAsia delays passing on the higher PSC, the bigger the financial impact, in our view. We have assumed that AirAsia will comply from July 1, 2019F,” it said.

CIMB Research expects International Maritime Organization’s sulphur cap by 2020 rules to drive crude oil and jet fuel prices in an upward direction, and raised its jet fuel assumptions from US$85 a barrel to US$90 for FY19F and US$95 for FY20F. 

AirAsia has covered only 5% of its FY19F jet fuel needs, and is largely exposed to the spot market. 

Meanwhile, the ringgit is currently trading at only RM4.17:US$1 vs its assumption of RM4.10 on average for FY19-20F.