AirAsia is still a BUY, at an unchanged RM3.39 FV, based on 11x FY13 earnings. We are adjusting some of our key assumptions in light of intensifying competition but are only lowering our FY14 estimates. Earlier this week, we showcased AirAsia and Asia Aviation at our Asean Corporate Day in Singapore, at which the requests for meetings were overwhelming. This may be a sign that AirAsia is back on investors’ radar. We deem concerns over Malindo being a threat overblown. Meanwhile, prospects for the group’s associates remain good.
Unfazed by competition. We believe the entry of Malindo will not pose a threat to AirAsia’s expansion plans as it has been pushing for early delivery of its aircraft orders. While passenger yields could take a hit as the new entrant chips away some of its market share, we believe the impact on AirAsia would be fairly minimal. Newcomer Malindo’s small fleet, and thus small scale of operation, would give it little room to offer its fares at steep discounts. Meanwhile, Malaysia AirAsia’s will utilise the increased capacity from 10 new aircraft to boost the frequency of existing routes (89% of the seats), as well as add new routes (11%). The group has secured the financing to buy new aircraft for 2013 at an attractive low interest rate of about 3% p.a.
Our assumptions. We expect the 10 new aircraft joining the fleet by end-2013 to boost AirAsia’s capacity by 13%. This is premised on an unchanged load factor of 78%. We have incorporated our estimated yield contraction of 5 sen (or 2.7% y-o-y) following the entry of Malindo, which we think would only make a minimal impact on AirAsia’s yields in view of the former’s small scale of operation. Our forecast for a jet fuel price of USD140/bbl for FY13 and FY14 remains unchanged vs the average forecast cost of USD135/bbl for 2012. All in, although we see a revenue dip due to lower yields, this does not change our latest estimated FY13 earnings, thanks to the airline’s improved economies of scale from operating a bigger fleet. However, in view of intensifying competition in the upcoming years, we are trimming AirAsia’s FY14 earnings by 4%.
Still a BUY. We maintain our BUY call on AirAsia, at an unchanged FV of RM3.39, premised on a 11x PE, which is still below the 12x average among its global low cost carrier peers. At the current 9x FY13 PE – after stripping off its stake in Thai AirAsia as reflected by Asia Aviation’s market cap – AirAsia makes for an attractive Buy.
KEY HIGHLIGHTS
We showcased AirAsia and Asia Aviation (FV: THB6.63) at our Asean Corporate Day Conference in Singapore earlier this week. There was overwhelming response to the meeting with Management, attracting the highest number of registrations from about 30 buy-side/fund managers from 22 different funds/houses. The key takeaways of the meeting
are:
Undeterred by competition. The entry of Malindo will in no way hinder AirAsia’s expansion plans, as the latter has been pushing for early for delivery of its aircraft. While passenger yields could bit a hit as Malindo may chip away some of AirAsia’s market share, we believe the impact would be fairly minimal. As we have reiterated, Malindo’s small fleet and hence small scale of operations will give it little room to offer steep fare discounts. We understand that Malindo intends to start operation in March with two aircraft, progressively beef up its fleet to 12 by year-end, and subsequently increase by an average 10 aircraft over the next few years. As far as poaching is concerned, we gather that no pilots have been pinched from AirAsia although about 10 cabin crew have left for Malindo, which is still on a recruitment drive. A check on its website, http://www.malindoair.com/, shows that the airline has yet to offerany promotions for early bird bookings.
Malaysia routes to focus on higher frequency. Some 89% of the capacity increase for Malaysia after the 10 new aircraft join the fleet will be allocated to additional frequencies while the remaining 11% will be for new routes to Indonesia and Thailand. Additional frequencies from its Kuala Lumpur hub will be to Bangkok, Kota Kinabalu, Sibu, Kuching and Johor, while the Johor hub will see more frequent flights to Kuching, Sibu, Miri and Penang. Financing for aircraft acquisitions has been secured for 2013 at an attractively low interest rate of approximately 3% per annum.
Thai AirAsia to benefit from Don Muang move. Thai AirAsia’s incoming 7 aircraft will see it adding more frequencies to China and Indo China of which it is also looking to fly a couple more new cities in China. Of the 7 aircraft, 5 will be carried into its balance sheet with the remaining as operating leases. Management guided that gearing is unlikely to go beyond 2x. Similar to Malaysia AirAsia, the allocated proportion for frequency increase and new route expansion is 90% and 10% respectively. Thai AirAsia targets to 10m passengers this year in line with our forecast. The recent move to Don Muang has given room to improve its operating efficiencies further on shorter aircraft turnaround time to reduce fuel wastage. Furthermore, cost cuts will also be boosted by the reduction in aircraft parking and landing charges. Passenger feedback has been generally positive due to the move to Don Muang airport given its closer proximity to the city. We have a BUY rating on Asia Aviation with a FV of THB6.63 of which we had upgraded it recently on the basis of higher adjusted EV /EBITDAR multiples from 11.7x.
Expansion plans for Indonesia. Meanwhile, Indonesia AirAsia will have a higher capacity increase allocated to new routes, at 50% allocation of the total new capacity added from its incoming 9 aircraft this year as it opens a new hub in Makasar (Sulawesi). Immediate term expansion plans is to focus on destinations outside Jakarta due to the airport congestion carriers are facing coupled by the intensifying competition. Indonesia AirAsia does not aim to aggressively expand its market share on routes that it competes head on with Lion Air as there is still a lot of room to grow organically by improving loads on its existing routes as it intends to triple its ticketing distribution network from the current 1000 points to 3000 points. The ticketing agency structure will be a low cost setup which will not be done jointly with Batavia after aborting its earlier proposed acquisition.
are:
Undeterred by competition. The entry of Malindo will in no way hinder AirAsia’s expansion plans, as the latter has been pushing for early for delivery of its aircraft. While passenger yields could bit a hit as Malindo may chip away some of AirAsia’s market share, we believe the impact would be fairly minimal. As we have reiterated, Malindo’s small fleet and hence small scale of operations will give it little room to offer steep fare discounts. We understand that Malindo intends to start operation in March with two aircraft, progressively beef up its fleet to 12 by year-end, and subsequently increase by an average 10 aircraft over the next few years. As far as poaching is concerned, we gather that no pilots have been pinched from AirAsia although about 10 cabin crew have left for Malindo, which is still on a recruitment drive. A check on its website, http://www.malindoair.com/, shows that the airline has yet to offerany promotions for early bird bookings.
Malaysia routes to focus on higher frequency. Some 89% of the capacity increase for Malaysia after the 10 new aircraft join the fleet will be allocated to additional frequencies while the remaining 11% will be for new routes to Indonesia and Thailand. Additional frequencies from its Kuala Lumpur hub will be to Bangkok, Kota Kinabalu, Sibu, Kuching and Johor, while the Johor hub will see more frequent flights to Kuching, Sibu, Miri and Penang. Financing for aircraft acquisitions has been secured for 2013 at an attractively low interest rate of approximately 3% per annum.
Thai AirAsia to benefit from Don Muang move. Thai AirAsia’s incoming 7 aircraft will see it adding more frequencies to China and Indo China of which it is also looking to fly a couple more new cities in China. Of the 7 aircraft, 5 will be carried into its balance sheet with the remaining as operating leases. Management guided that gearing is unlikely to go beyond 2x. Similar to Malaysia AirAsia, the allocated proportion for frequency increase and new route expansion is 90% and 10% respectively. Thai AirAsia targets to 10m passengers this year in line with our forecast. The recent move to Don Muang has given room to improve its operating efficiencies further on shorter aircraft turnaround time to reduce fuel wastage. Furthermore, cost cuts will also be boosted by the reduction in aircraft parking and landing charges. Passenger feedback has been generally positive due to the move to Don Muang airport given its closer proximity to the city. We have a BUY rating on Asia Aviation with a FV of THB6.63 of which we had upgraded it recently on the basis of higher adjusted EV /EBITDAR multiples from 11.7x.
Expansion plans for Indonesia. Meanwhile, Indonesia AirAsia will have a higher capacity increase allocated to new routes, at 50% allocation of the total new capacity added from its incoming 9 aircraft this year as it opens a new hub in Makasar (Sulawesi). Immediate term expansion plans is to focus on destinations outside Jakarta due to the airport congestion carriers are facing coupled by the intensifying competition. Indonesia AirAsia does not aim to aggressively expand its market share on routes that it competes head on with Lion Air as there is still a lot of room to grow organically by improving loads on its existing routes as it intends to triple its ticketing distribution network from the current 1000 points to 3000 points. The ticketing agency structure will be a low cost setup which will not be done jointly with Batavia after aborting its earlier proposed acquisition.
The smaller babies. For AirAsia’s new associate setups, Japan and the Philippines will be
adding 3-4 and 1-2 aircraft respectively, while AirAsia X is looking to add 7 wide body
aircraft as it aims to triple frequencies its Australia sectors and doubling them for Japan
and Korea and chartering flights for pilgrimage services. AirAsia’s X increasing fleet bodes
well as a passenger feeder into other AirAsia’s short haul network. On the other hand
AirAsia’s non-airline associate, Expedia, is expected to continue its profitability growth
momentum.
Update on upcoming IPOs. Indonesia AirAsia’s upcoming IPO listing is scheduled sometime in 2H 2013 and hopes to raise roughly USD200m to strengthen its balance sheet. At a conservative estimated earnings forecast of RM41.2m for FY14, its potential market cap could range RM450m to RM530m premised at 11-13 x forward PE. AirAsia X’s IPO is also likely to happen this year too. However, due to its balance sheet constraint , Management guided that it is unlikely that Indonesia AirAsia will put in another aircraft into its balance sheet until FY14 at the very earliest.
Acquisitions and new hubs. Due to stiff competition and limited landing slot availability, AirAsia’s Philippines associate is facing a challenging situation indeed. One shortcut to quickly overcome this is to acquire another carrier. The media reported sometime in September last year that Zest Airways could be a likely acquisition candidate for AirAsia to expand its market share. Zest Airways operates 11 A320s in its fleet which makes it an ideal candidate for AirAsia as a full fleet operator of A320s. AirAsia continues to eye other countries that it could paint the sky red as its new hub but preferring to start up fresh with a local partner which doesn’t necessarily have to be from the aviation sector. We understand that discussions are ongoing for a possible new hub in India which was hinted by Tony’s twitter update and the presence of reporters from India in the media briefing of AirAsia’s first delivered sharket tipped wing aircraft. India is the biggest market for commercial aircraft manufacturers after China given the rising middle class and urbanization rate. Korea is also another potential market that it is eyeing though this is old news for investors.
Adjusting assumptions, higher earnings projected. We present our assumptions overleaf and the changes made which we still think are fairly conservative. We foresee that with 10 aircrafts by end 2013 (previously only 7), capacity growth is expected to be at 13% (previously 1%) as we think most of the aircraft deliveries will be done in the 2H. This is premised on an unchanged load factor of 78% assumption compared to FY12 although we have reduced FY14 load factor to 77.5%. Our yield contraction of 5sen (or 2.7% y-o-y, which is higher than our previous forecast of 2%) has already factored in the entry of Malindo which we reckon would make minimal impact to hurt AirAsia’s yields due to the former’s small scale of operations. Our forecast for jet fuel price of USD140/bbl for FY13 and FY14 remains unchanged versus the average forecast cost of USD135/bbl for 2012 (actual average is USD129/bbl). All in, revenue is reduced due to the lower yields fetched but these latest inputs see no changes in earnings for FY13 on the back of improved economies of scale from operating a higher number of aircraft fleet. However FY14 earnings estimate is trimmed down by some 4% as competition intensifies further in the coming years.
Maintain BUY. We maintain our BUY call on AirAsia, at an unchanged FV of RM3.39, premised on 11x PE. This is still below the global sector low cost carrier peers’ average of 12x. We like AirAsia’s resilient business low cost carrier business that taps into the growing middle income segment, as well as its expanding associates’ earnings potential. Reflecting its stake in listed Asia Aviation’s market cap, AirAsia is trading at a cheap 9x PE versus its peers’ historical average of 10x and 12x. We are now promoting AirAsia as a tactical top pic for the short term among our Malaysian aviation coverage. This is on anticipation of its 4Q earnings surprising on the upside. The group’s upcoming IPOs will further crystalize its valuations, which we estimate a RNAV of RM4.00-RM4.20.
adding 3-4 and 1-2 aircraft respectively, while AirAsia X is looking to add 7 wide body
aircraft as it aims to triple frequencies its Australia sectors and doubling them for Japan
and Korea and chartering flights for pilgrimage services. AirAsia’s X increasing fleet bodes
well as a passenger feeder into other AirAsia’s short haul network. On the other hand
AirAsia’s non-airline associate, Expedia, is expected to continue its profitability growth
momentum.
Update on upcoming IPOs. Indonesia AirAsia’s upcoming IPO listing is scheduled sometime in 2H 2013 and hopes to raise roughly USD200m to strengthen its balance sheet. At a conservative estimated earnings forecast of RM41.2m for FY14, its potential market cap could range RM450m to RM530m premised at 11-13 x forward PE. AirAsia X’s IPO is also likely to happen this year too. However, due to its balance sheet constraint , Management guided that it is unlikely that Indonesia AirAsia will put in another aircraft into its balance sheet until FY14 at the very earliest.
Acquisitions and new hubs. Due to stiff competition and limited landing slot availability, AirAsia’s Philippines associate is facing a challenging situation indeed. One shortcut to quickly overcome this is to acquire another carrier. The media reported sometime in September last year that Zest Airways could be a likely acquisition candidate for AirAsia to expand its market share. Zest Airways operates 11 A320s in its fleet which makes it an ideal candidate for AirAsia as a full fleet operator of A320s. AirAsia continues to eye other countries that it could paint the sky red as its new hub but preferring to start up fresh with a local partner which doesn’t necessarily have to be from the aviation sector. We understand that discussions are ongoing for a possible new hub in India which was hinted by Tony’s twitter update and the presence of reporters from India in the media briefing of AirAsia’s first delivered sharket tipped wing aircraft. India is the biggest market for commercial aircraft manufacturers after China given the rising middle class and urbanization rate. Korea is also another potential market that it is eyeing though this is old news for investors.
Adjusting assumptions, higher earnings projected. We present our assumptions overleaf and the changes made which we still think are fairly conservative. We foresee that with 10 aircrafts by end 2013 (previously only 7), capacity growth is expected to be at 13% (previously 1%) as we think most of the aircraft deliveries will be done in the 2H. This is premised on an unchanged load factor of 78% assumption compared to FY12 although we have reduced FY14 load factor to 77.5%. Our yield contraction of 5sen (or 2.7% y-o-y, which is higher than our previous forecast of 2%) has already factored in the entry of Malindo which we reckon would make minimal impact to hurt AirAsia’s yields due to the former’s small scale of operations. Our forecast for jet fuel price of USD140/bbl for FY13 and FY14 remains unchanged versus the average forecast cost of USD135/bbl for 2012 (actual average is USD129/bbl). All in, revenue is reduced due to the lower yields fetched but these latest inputs see no changes in earnings for FY13 on the back of improved economies of scale from operating a higher number of aircraft fleet. However FY14 earnings estimate is trimmed down by some 4% as competition intensifies further in the coming years.
Maintain BUY. We maintain our BUY call on AirAsia, at an unchanged FV of RM3.39, premised on 11x PE. This is still below the global sector low cost carrier peers’ average of 12x. We like AirAsia’s resilient business low cost carrier business that taps into the growing middle income segment, as well as its expanding associates’ earnings potential. Reflecting its stake in listed Asia Aviation’s market cap, AirAsia is trading at a cheap 9x PE versus its peers’ historical average of 10x and 12x. We are now promoting AirAsia as a tactical top pic for the short term among our Malaysian aviation coverage. This is on anticipation of its 4Q earnings surprising on the upside. The group’s upcoming IPOs will further crystalize its valuations, which we estimate a RNAV of RM4.00-RM4.20.
Source: OSK
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