Intensifying competition in airline industry


KUALA LUMPUR: Affin Hwang Capital Research has upgraded AirAsia Bhd due to improving affiliate contribution and the imminent sale of its leasing arm.

The research house has maintained a “buy” call on AirAsia X as it remained confident on its earnings turnaround sustainability. 

“We remain contrarian on Malaysia Airports Holdings Bhd (MAHB) with a ‘sell’ rating as we see downside risks from its Turkey operation due to declining passenger growth and believe operational-cost escalation could hurt earnings,” Affin said in a report. 

The research house said 2017 was shaping up to be a challenging year for aviation due to aggressive expansion by regional players, but both AirAsia and AirAsia X look well positioned to weather yield pressure with their cost-competitiveness superiority and dominant market share. 

Last year has been a highly profitable year for aviation industry as a whole, characterised by record-low jet-fuel prices, soaring air travel demand and a benign competitive environment owing to under-expansion in prior years. 

Both AirAsia and AirAsia X posted record profitability in 2016, bolstered by declining fuel prices, robust passenger-demand growth and benign industry-capacity additions. 

“Heading into 2017, we expect industry headwinds from heightened competition on the reinvigoration of Malaysia Airlines and aggressive expansion by Malindo Air to pressure industry yields, leading to RASK decline,” it said.

Affin expects AirAsia to weather the impending yield pressure with its cost competitiveness superiority, underpinned by higher aircraft-utilisation hours and process digitalisation to protect yield spreads. 

It said the successful turnaround of the previously loss-making affiliates in Indonesia and Philippines should stem the decline in Thailand, and provide bottom-line support amidst intensifying competition in Malaysia. 

“We also expect the upcoming sale of its leasing arm at US$1bil to provide much-needed capital to pare down its borrowings and fund the 21 aircraft additions to its fleet in 2017,” it said adding that the potential listing of its Asean affiliates and holding company at HKSE/NYSE could crystallise the embedded value and rerate the share price. 

Affin has raised its our estimates by 25% for FY17, primarily after lifting its earnings assumption for its associate contribution. Its 12M target price is now lifted to RM3.80, pegged to an unchanged 10x CY17E EPS.

Affin also expected AirAsia X earnings turnaround to be sustainable due to ongoing route optimisation and efficient capacity deployment. 

“We see room in cutting CASK further via higher aircraft-utilisation efficiencies, which should also see a corresponding 25% increase in ASK with incremental flight frequencies and potential new routes.

“We continue to favour AirAsia X for its turnaround story and continuous drive for cost optimisation. We maintain our BUY rating with an unchanged 12-month target price of RM0.57, pegged to an unchanged 8x CY17E EPS,” Affin said. 

Meanwhile, Affin said the disappointing passenger growth from its Turkey operation on the horizon, ISG is not expected to break even at least until 2019, and this should continue to be a key drag on MAHB’s earnings.

It noted that shareholder-return generation remained unappealing with less than a 5% ROE and low 1-2% dividend yields despite the recent PSC revision and concession-agreement extension.

“With declining unit revenue due to lower pax spend and escalating costs on incremental maintenance expenses at key airports in its stable, we continue to see pressure on Ebitda delivery. 

“Our assumptions imply only 2% in Ebitda growth despite a 5% top-line increase. 
“We maintain our contrarian ‘sell’ call on MAHB, but we lift our 12M discounted cash flow-derived target price to RM5.80 after lowering our capex assumptions,” Affin said. 
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