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KUALA LUMPUR: CIMB Equities Research expects higher fuel prices to pressure AirAsia Group Bhd’s (AAGB) earnings as it only hedged about 12% of its FY18F jet fuel needs at US$68.55 per barrel.
The research house said on Friday its forecast assumed an average spot price of jet at US$85 for FY18F; the year-to-date average is US$80 but jet fuel is trading at US$88 currently.
“Every US$5 a barrel rise in spot jet fuel prices will reduce AAGB’s core earnings by 21%. The weaker airlines in the group, Indonesia AirAsia (IAA) and Philippines AirAsia (PAA, are expected to suffer net losses in FY18F, from profits last year,” said CIMB Research.
AAGB’s 1Q18 core net profit was 34% of its previous full-year forecast, but considers it to be c.5% below expectations as AirAsia India’s (AAI) losses were higher than expected.
“We maintain our Hold call, with a slightly lower target price of RM3.63, still based on 12 times CY19F P/E and adding a 98 sen special dividend.
“Upside risks: continued demand and yield strength at Malaysia AirAsia (MAA) and Thai AirAsia (TAA). Downside risks: spot jet fuel prices have risen to US$88 against our assumption of US$85,” it said.
CIMB Research pointed out AAGB’s 1Q18 core net profit of RM303mil was 43% higher year-on-year on the back of 1) 38% rise in MAA’s profits to RM300mil, 2) almost doubling of AAGB’s share of TAA’s profits to RM100mil, but partially offset by 3) 57% increase in IAA’s losses, 4) slight decline in PAA’s profits due to peso depreciation, 5) 10% increase in AAGB’s share of AAJ losses and 6) 63% increase in AAI’s losses.
“Although jet fuel prices rose 24% year-on-year to US$83 during 1Q18, its impact was mitigated by the 12% appreciation of the ringgit to 3.92,” it said.
CIMB Research valued the ongoing earnings of AAGB based on CY19F P/E of 12 times, which is at a 20% discount to the sector average of about 15 times, but which it believes is reasonable given that
AAGB is still responsible for funding the losses at IAA, PAA and AirAsia Japan (AAJ).
“We believe that AAGB’s core earnings are worth RM2.66 a share. On top of that, we have added 98 sen a share in special dividends to derive our target price of RM3.63,” it said.
The research house’s assumption of 98 sen a share in special dividends comprised of the following: a) 75 sen a share from the sale of 84 planes and 48 Airbus orders to BBAM (followed by subsequent leaseback).
It highlighted that in AAGB’s shareholder circular dated April 28, 2018 relating to the BBAM transaction, AAGB noted that it will receive gross cash proceeds of US$1.120bil, of which it will set aside approximately US$638mil (c.RM2.5bil) for the payment of special dividends.
This transaction is expected to be completed by 3Q18F.
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