AirAsia - Marred by Associates' Start-up Costs

AirAsia’s weak earnings let down OSK and consensus estimates, forcing us to slash our FY12 bottomline forecast by 28%. While the low cost carrier’s earnings were dragged down by higher expenses as well as losses from its associates, we continue to think that AirAsia’s outlook is set to improve in the immediate term. We maintain Our BUY call, but with a lower FV of RM4.10 (from RM4.57, based on FY12 earnings), premised on 12x on FY13 earnings.

Mauled by higher costs and associate losses. AirAsia reported a core net profit (excluding exceptional items and including associates in Thai and Indo) of RM297.2m for 1HFY12 (q-o-q: -25%, y-o-y: -19%, YTD: -5%) on the back of revenue of RM2.35bn (q-o-q: +1%, y-o-y: +9%, YTD: +10%). During 2Q, the low cost carrier booked a hefty accounting profit gain of RM1.16bn on fair value adjustments to reflect its Thai association, Asia Aviation’s IPO price. While the revenue was in line, accounting for 44% of our full-year estimates, AirAsia’s bottom-line numbers fell short of our and consensus forecasts, accounting for 28% to 33% of the full-year forecasts. The profit was lower largely arose from its Japan and Philippine associates start-up losses while its Thai AirAsia saw earnings weakened by congestion in Bangkok airport. In addition, the group also incurred higher expenses relating to airport user charges (on a reduction of incentives), as well as higher maintenance and leasing costs. 

Yields and 2H outlook. AirAsia’s yield continues to grow albeit at a more moderate pace, ticking up by 2% after a surcharge was imposed with effect from May last year, as well as the absence of competition from Firefly the East Malaysian routes. Yield was seasonally lower q-o-q by 1% as management toyed with the idea of cutting baggage charges in 2QFY12. As the baggage demand is inelastic, AirAsia has again moved up those charges, which should boost revenue in 2H. Meanwhile, the outlook remains positive for AirAsia although the start-up losses from Manila and Japan will still weigh on earnings. More positively, Expedia is expected to turn profitable in 2H, while Thai AirAsia’s earnings will improve after moving to Don Muang airport to improve efficiency and maximize user discounts, with Indonesia AirAsia also expected to see better numbers. That said, AirAsia is unlikely to continue to see losses from Manila and Japan as the quantum may exceed its invested capital (YTD losses of RM37.4m and RM22.9m). Currently, AirAsia’s fleet expansion drive is in progress, with the carrier bringing forward the delivery of six and twelve additional aircraft for FY13 and FY14 respectively.    

Maintain BUY. Given the earnings shortfall, we cut our FY12 estimate by 28%. However, after including better numbers from its associates and higher revenue arising from bringing forward the delivery of new aircraft, we raise our FY13 earnings forecast by 1.2%. Maintain BUY, at a lower FV of RM4.10, based on 12x FY13 earnings.

Source: OSK