AirAsia - Dragged by Associates

AirAsia’s 3Q core net profit fell  short  of  our  expectations  due  to  the  profit  drag from  Thai  AirAsia.  Positively  yields  has  picked  up  as  ancillary  income  recovers although  near  term  headwinds  next  year  with  Malindo  coming  in  could  sparkintensifying  competition  that  would  put  pressure  on  yields.  We  downgrade earnings by 2-10% as we lower our yield forecasts. Maintain BUY at a lower FV of RM3.39  as  we  lower  our  PE  multiple  to  11x.    The  retracement  in  its  share  pricepresents an opportunity to accumulate at this level.  

Earnings  dragged  by  associates.  AirAsia’s 3Q core net profit including its share of associates’ earnings came in at RM166m (q-o-q: +30%, y-o-y: +15%, YTD: +1%), which fell  short  of  our  expectations  of  RM225.3.  The  results  also  missed  consensus.  For  the 9MFY12,  accumulated  core  earnings  stood  at  RM463m;  accounting  for  57%  of  our  full year  forecasts.  The  earnings  shortfall  was  largely  attributed  to  lower  than  expected contributions  from  Thai  AirAsia  due  to  one  off  expenses  for shifting  operations  to  Don Muang. Losses from its Philippines (which is not equity accounted anymore) and Japan AirAsia were largely expected although this was offset by profits from training academy and  Expedia.  Despite  the  drag  from  these  associates,  AirAsia’s  Earnings  before associates for the 9MFY12 of RM464m were still commendable coming in line within our estimates,  of  which  accounted  for  59%  of  our  full  year  forecast  in  anticipation  of  a seasonally  stronger  4Q.  As  a  comparison,  last  year’s  9MFY11  earnings  before associates accounted for 57% of its FY11 earnings.

Yields and ancillary picking up but not for long. As anticipated, yields are picking up, growing by 6% y-o-y to 20sen/RPK. Ancillary revenue per pax also also nudged higher by  21.4%  y-o-y  following  the  revision  of  baggage  tariff  in  late  2Q.  However,  with upcoming  competition  from  Malindo  to  set  in,  yields  could  face  pressure  in  the immediate term. We now conservatively lower our yield forecasts from 20.1sen/RPK to 19.9/RPK.  Note  that  last  year  when  price  war  sparked  between  Firefly/MAS,  AirAsia yields  dropped  by  3.8%  and  6.3%  y-o-y  to  17.8sen/RPK  and  18.9sen/RPK  in  1QFY11 and  2QFY11  respectively.  While  we  remain  confident  that  AirAsia  will  weather  the intensifying  competition  coming  in,  there  will  be  no  escape  on  the  pressure  in  yields, hence. The lower yields assumptions now coupled by the lower profit contributions from Thai  AirAsia  for  FY12-FY14  trims AirAsia’s core earnings for FY12/FY13/FY14 by 2%/5%/10%  respectively.  However,  we  still  opine  that  market  is  overreacting  on competition from Malindo as we think the immediate term threat  would not be like what AirAsia experienced back against Firefly and MAS.

Maintain  BUY.  The  lower  estimate  slashes  FV  to  RM3.39.    However,  our  BUY  call  is maintained premised at a lower PE of 11x as opposed to 12x earlier to price in risks of severe  competition.  Trading  at  a  FY13  PE  of  9.2x,  now  presents  an  opportunity  to accumulate AirAsia as its cheap compared to the 12x PE fetched by its peers.

Source: OSK