- We maintain our BUY call on AirAsia (AA), with a higher fair value of RM4.40/share (vs. RM4.20/share previously) as we roll over valuations to FY13F. We have switched to a PE valuation (vs. SOP valuation previously) as our FY13F earnings factor in contributions from associates (ex-IAA). Our valuation still pegs AA at a 12x PE multiple.
- AA reported a core net profit of RM115mil for its 2Q12 (excluding RM1bil revaluation gain on the listing of TAA, Thai AirAsia). This brought 1H12 core earnings to RM268mil, which is within expectations accounting for 33% of our FY12F earnings and 30% of consensus.
- Notably, earnings were down 16% YoY despite a 10% revenue increase (coming off an 8% increase in average fares and 10% increase in pax traffic) given the absence of incentives from MAHB (CASK increased 7% YoY and 3% QoQ) and exceptionally low charges for ancillary services (ancillary income/pax reduced by 26% YoY and 7% QoQ to RM37/pax).
- Nonetheless, we see scope for CASK to be reduced in the coming quarters as AA renews its incentive scheme with MAHB. AA typically books in circa RM22mil of traffic incentives which offset user & station charges and such incentives were absent in 2Q12.
- Additionally, the 2Q12 results also factor in management’s failed attempt to stimulate demand by lowering ancillary income. Since end-June, AA has restored its ancillary service pricing and this should show a positive impact in 2H12.
- AA is bringing forward 18 aircraft deliveries to 2013-2014 from scheduled 2015-2017 deliveries (6 brought forward to 2013 and 12 to 2014). This should accelerate growth and we see scope for earnings upside, depending on deployment of the additional capacity.
- A key risk to our projections is jet fuel price, which has been on an upward trend since late June (from circa USD105/barrel rising to USD131/barrel latest). Nonetheless, average jet fuel price has fallen from USD133/barrel in 1Q12 to USD122/barrel in 2Q12. Meanwhile, since end June, jet fuep price has avearged at USD121.6/barrel.
- AA is still cheap trading at 10x FY13F earnings. We like AA for company-specific reasons: (1) Exit of MAS from the jet LCC space elevates AA’s yield upside potential substantially; (2) Strong growth potential form accelerated aircraft deliveries; (3) A comprehensive route network developed by Malaysia AirAsia in ASEAN allows associates to develop their routes at much lower incremental cost; (4) Development of new associates, particularly AA Japan, TAA and IAA (acquisition Batavia Air accelerates domestic capacity growth substantially – see Report dated 27 July 2012).
Source: AmeSecurities
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