Deutsche Bank downgrades AirAsia on high jetfuel prices


PETALING JAYA: Deutsche Bank Research has downgraded low-cost carrier AirAsia Bhd to “sell” from “hold” in view of higher jet fuel prices, weaker ringgit and impact on passenger yields due to capacity growth from competitors.

The research house has cut the budget airline’s 2018 earnings before interest and taxes (EBIT) forecast by 14%, or 28% below consensus.

“We now expect EBIT to decline 36% from 2016 to 2018. The reduction to the EBIT forecast has also led us to cut our valuation for the Malaysian business and this results in a target price cut of 44% for AirAsia.”

Deutsche Bank Research said capacity increases in Malaysia would hurt yields over this year and next.

“AirAsia is adding seven aircraft to the fleet in 2017, compared to a decline of two in 2016. Malindo added 16 aircraft in 2016 and should see the full-year impact of the capacity in 2017.

“Malaysia Airlines has stopped reducing capacity and is taking delivery of its new A350s. We expect increased capacity in Malaysia to result in pricing pressures and yield declines.”

Deutsche Bank Research considers a weaker ringgit as negative for the airline because of the airline’s US dollar expenses, capital expenditure and debt.

“We estimate that half of its 2016 operating costs (including interest expense) is in (US) dollar.”

The research house pointed out that 90% of AirAsia’s debt is in US dollar, although the low-cost carrier claims that it has hedged 47% of its dollar loans at 3.2348 to the ringgit for the remainder of its tenure.

“Another 20% of the (US) dollar loans are related to aircraft leased to associates, whose lease rentals are in dollar and hence there is some degree of natural hedge here.

“We have an in-house forecast of the ringgit depreciating to 4.6 to the (US) dollar by end-2017, versus 4.48 at present. A weaker ringgit has historically had an impact on the stock price.”

Deutsche Bank Research emphasised also that fuel prices have started to nudge up again over recent months.

“Jet fuel expenses represent 33% of our operating expenses in 2017. Our in-house forecasts for jet fuel are US$65/US$78/US$80 per barrel over 2017 to 2019, respectively, and the spot price is US$63 per barrel.

“The company has hedged 74% of its jet fuel requirements in 2017 at US$60 per barrel.”

AirAsia swung to a net profit of RM353.89mil in the third quarter ended Sept 30, 2016, from a loss of RM405.73mil a year earlier.

Revenue in the third quarter rose to RM1.69bil, compared with RM1.52bil in the same period last year. Its earnings per share for the quarter stood at 12.70 sen against a loss per share of 14.60 sen.

The revenue was supported by a 5% growth in passenger volume while the average fare was up 4% at RM164 compared with RM157 a year ago.

As at Sept 30, the airline’s total debt was RM10.3bil and its net debt after offsetting the cash balances amounted to RM8.8bil.

For the first nine months to Sept 30, AirAsia’s net profit surged to RM1.57bil, or 56.50 sen earnings per share compared, with a net loss of RM13.37mil, or 0.5 sen loss per share. Its revenue for the period rose to RM5bil against RM4.14bil previously.

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