AirAsia upgraded to Add at CIMB Research

KUALA LUMPUR: CIMB Equities Research has upgraded low-cost carrier AirAsia Bhd from Hold to Add after a 14% decline from its recent peak as investors can benefit from two immediate share price catalysts in the next three to six months.

The research house said on Tuesday that AirAsia disclosed in May that it had narrowed down the bidders for its leading arm Asia Aviation Capital Ltd (AAC) to the final two names; we believe that the announcement of the winning bid may be close. 

It also pointed out that Malindo has cut seat capacity in the domestic market, helping AirAsia to gain market share and raise yields, which should lead to strong second quarter and third quarter earnings.

“Our target price (RM3.51) is based on nine times CY18F P/E and adding RM1.12 special dividend per share),” it said.

CIMB Research said there were three issues it had been concerned with: 1) AirAsia’s intention to merge with AAX, 2) the plans to start new airlines in Vietnam and China, 3) the potential for competition to escalate in FY18F, and 4) the possible rise in oil prices. 

While these issues continue to be valid in the longer term, they are not likely to be of concern in the next six months, in the research house’s view, where its gaze is firmly fixed right now.  

“Based on direct feedback from AirAsia, we believe that it is not likely to merge with AAX, at least not in the foreseeable future, even if there may be, in our view, longer-term intention to do so,” it said. 

The proposed new airline in Vietnam, which it expects to suffer sustained losses for the first few years, is only targeted to begin operations in 2H18F and only if it gets regulatory approval, which is not a given, in its view. 

China may start even later, in 2019F. Also, oil prices have been lower-than-expected due to the persistent glut. 

While capacity expansion by Malindo is a persistent concern, recent moves by Malindo to rationalise capacity deployment have been to AirAsia’s benefit. 

In early April, Malindo halved its capacity to Kota Kinabalu and Kuching from KL as well as terminated its KL-Miri route. 

These moves removed 13% of Malindo’s combined domestic capacity from Subang and KLIA and increased AirAsia’s domestic market share by 3% pts from 44.7% in 1Q17 to 47.7% in 2Q17. 
“We forecast this to rise further to 48.8% by 4Q17F.  

“We believe the higher domestic market share will help improve 2Q and 2H yields, helping to reverse the yield pressures in Malaysia felt during the 1Q. 

“We believe load factors rose from 88% in 1Q to an all-time high of 90% in 2Q. AirAsia’s 1Q results had disappointed the market due to RM140m-150m one-off moving costs but we think this is unlikely to recur in the 2Q,” it said.

CIMB Research also pointed out macro factors are supportive of stronger earnings as the US$ weakened 2.6% on-quarter to an average of RM4.33 while jet fuel prices fell 4.3% on-quarter. 

 On a on-year basis, we believe that AirAsia may deliver better results in 2Q17F despite the ringgit being weaker by 5.7% on-year and the jet fuel price (inclusive of hedging) higher by 11% on-year. This is because we expect loads to be 4% pts higher on-year, offsetting most or all of the cost hikes. 

In May, AirAsia said that it narrowed down the potential bidders for a 70-80% stake in its leasing arm, AAC, to just two names. Hence, we believe that the conclusion of the sale is close. 
“We project a special dividend of RM1.12/share if AAC achieves a valuation of at least US$1bil and a 70% stake is sold. 

“Separately, AirAsia’s foreign shareholding level has declined from 54% as at Dec 31, 2016 to just 44% as at June 30, 2017 due to profit taking, in our view; this is typically where the foreign shareholding level settles,” it said.
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