AirAsia - A New Dawn

The AirAsia future growth story in the next decade would be an exciting one. From 1 July, regional head of corporate finance, Aireen Omar, will take over as CEO of Malaysia AirAsia while Tony Fernandes will move on as Group CEO in AirAsia's ASEAN office. These management changes will propel the AirAsia Group to the next node of regional expansion, which will entail taking the leap into 5 potential markets. As the stock is trading at a PE of 9.65x on FY12 earnings vs the peer average of 12x, we maintain our BUY call on AirAsia, with our FV unchanged at RM4.57. AirAsia is our top pick among Transport stocks under our coverage.

Major management changes. AirAsia yesterday announced that Aireen Omar, a face familiar to investors, has been appointed CEO of Malaysia AirAsia, a role previously held by Tony Fernandes, who will assume the role of AirAsia's Group CEO. Aireen, formerly AirAsia regional head of corporate finance and treasury, has a decade of experience as an investment banker specialized in the debt capital market. Aireen has been instrumental in the Group's fleet expansion since she joined in 2006. She replaces Tony Fernandes, which will take on a regional role in AirAsia ASEAN, together with his deputy Kamaruddin Meranun. All of AirAsia’s country heads will continue to report to Fernandes as Group CEO. AirAsia Asean is AirAsia's new regional office, which will be remotely located in Jakarta - physically and psychologically far enough from all of AirAsia's offices to avoid any daily operational routines. The setting up of AirAsia ASEAN will allow the group’s regional team to focus on AirAsia Group’s overall growth regionally. We have great confidence that Aireen will take Malaysia AirAsia to greater heights. Aireen said she intends to maintain and grow AirAsia's current 60% domestic and 40% international market shares. She added that the main challenges she faces are maintaining market leadership, cost discipline and increasing revenue. We congratulate Aireen and wish her the best in her new position as Malaysia AirAsia CEO.  

 Bringing back the old team. According to media reports, Datuk Bernard Francis - formerly Executive VP of sales and marketing with MAS - will rejoin AirAsia, where he was previously regional director of Revenue Management. We believe that Francis is likely to join Fernandes at the Jakarta regional office along with Rozman Omar, who also recently left MAS. Rozman, previously the CFO of AirAsia Malaysia, joined MAS last year after the share swap between the two airlines was inked.  Meanwhile, Azhari Mohd Dahlan, who headed MAS’ engineering and maintenance division, has also rejoined AirAsia.

A new decade, a new growth era. Painting Asean’s skies red with its signature colour, AirAsia operates hubs in Malaysia, Indonesia, Thailand and Philippines. Singapore is the only missing link, as AirAsia has yet to establish an entity in that country although it is already functioning as a hub to some degree, given its significant market share at Changi Airport. The Group currently boasts a fleet of 100 aircraft, of which 55 are from Malaysia, 26 from Thailand, 17 from Indonesia and 2 from Philippines. It plans to add 4 new aircraft for Japan in the immediate term.

The next growth leap. AirAsia will continue to extend its growing franchise to other countries in the region by signing more pacts with regional airlines, similar to what it did with AirAsia Japan, via a partnership with Japan's All Nippon Airways. Tony Fernandes has identified South Korea, Vietnam, Cambodia, India and China as potential markets. He said that to cater for these new markets, the rate at which AirAsia is expanding its fleet is insufficient. We understand that AirAsia is pushing to bring forward the delivery of its aircraft, and also note that AirAsia's board will also approve the proposal to order about 50 new A320s with an option for 50 from Airbus SAS in one to two months. Apart from its regional growth plan and ahead of the listing of its Indonesian associate, we believe that Management may in the immediate term focus on growing its Indonesian market given that air travel remains under penetrated due to its large population of over 200m. AirAsia is also solidifying its regional presence ahead of the implementation of the open skies policy in 2015.

Maintain BUY. We maintain our BUY call on AirAsia. The stock's valuation remains attractive as it is trading at a PE of 9.65x on FY12 earnings vs the peer average of 12x. Furthermore, given the retracement in oil prices, there could be more upside to our earnings forecast. We maintain our BUY call on AirAsia, with our FV unchanged at RM4.57. We continue to like AirAsia's growth story despite concerns of an already saturated market in Malaysia. The introduction of new routes and increasing flight frequencies coupled with innovative ways to boost ancillary earnings will continue to make Malaysia a significant contributor to earnings. The elimination of direct competition from MAS and Firefly will also allow AirAsia to sustain its yields going forward. That said, in view of the uncertain macro-outlook in the immediate term, AirAsia is poised to reap the benefits of down-trading by travellers. Maintain BUY on AirAsia, our top pick in the transport sector.

Source: OSK