- We remain
NEUTRAL on the aviation sector: The recent 4Q12 results season was a pretty
contrasting one for the two airlines under our coverage. AirAsia (AA) beat
estimates while MAS disappointed, albeit with an improvement in core operating performance
in 4Q12.
- AA
registered exceptionally strong yields: A key surprise in AA’s results was
stronger-than-expected yields in 4Q12 (+5% QoQ, +7% YTD). However, the 4Q12
performance cannot be taken as a yardstick for earnings trend going forward as
AA is currently enjoying a “honeymoon period” without any serious LCC
competition domestically. Another surprise was AA’s announcement of its maiden
dividend policy, i.e. 20% of core annual earnings. While the move may attract a
different breed of investors to the group, FY13 yield of 2% is not particularly
attractive relative to other dividend stocks in the index, in our opinion.
- MAS still
in the red, but shows early signs of improvement: MAS remained in the red in
4Q12, but saw a significant improvement YoY narrowing its core net loss to
RM33mil vs. RM232mil in 4Q11 – similar YoY trend since 2Q12. In particular, RASK
was up by 5% YoY given aggressive capacity cuts on unprofitable routes. Going
forward, we see the possibility of further improvements in MAS’ earnings driven
by:- (1) Continued fleet renewal which will gradually improve pricing power;
(2) A potential boost to feeder traffic from MAS’ entry into OneWorld. Due to
MAS’ choppy earnings track record, however, we believe investors want to see
more earnings stability before turning more bullish.
- Influx of
capacity, yield outlook to deteriorate: A sharp increase in capacity on the
domestic front is likely to impact profitability – both airlines are shrugging
off the upcoming competition. Malindo Air is starting from mid-March with the
highly profitable KL-East Malaysia as its initial routes. A key takeaway from
briefings by MAS and AA was that both airlines have flooded capacity on these
routes – AA increased frequencies to 6 domestic destinations including KL to
Kota Kinabalu, Sibu and Kuching as well as Johor Bahru to Kuching, Sibu and
Miri. MAS has increased scheduled capacity to East Malaysia by 36%. Overall,
for FY13, MAS is guiding for a 5% increase in total capacity, while AA
(Malaysia) is estimated to increase capacity by 17% via the induction of 10
additional A320s. This capacity influx ahead of new competition means yield
outlook is set to deteriorate in the next 1-2 years. Malindo is targeting to
have 13 aircraft (B739s) by year-end. We estimate 10%-12% capacity growth for
domestic airlines in FY13, though this may vary depending on actual sector
length and timing of aircraft delivery. AA’s yields are particularly sensitive
to changes in sector capacity as its priority is filling up seats to match its
own aggressive capacity growth (See chart 1). An every 0.5 sen change in yields
impacts bottom line by 17% (AA) and >50% (MAS).
- Fuel cost
remains elevated: Fuel cost which remains elevated is another key threat,
particularly at a time when yields are expected to see downward pressure. Our
projections over FY13F-14F model in an average jet fuel price of USD120-USD125/barrel.
An every USD1/barrel change impacts bottom line by 15% and 2% for MAS and AA,
respectively.
- We remain
Neutral on both local airlines: We leave our projections unchanged for AA – we
have modelled in a 1.2% contraction in FY13F yields. Given deeper-than-expected
losses for MAS in FY12, we expect profitability to be pushed further out into
FY14F. Nonetheless, FY13F should see a further narrowing in core operational
losses. Our fair value for AA is left unchanged at RM2.80/share (10x FY13F
earnings), while MAS’ fair value is lowered to RM0.75/share (pegged to 0.9x
FY13F BV, at a 10% discount to sector PBV of 1x). Our HOLD calls on AA and MAS
remain unchanged. Valuation multiples are unlikely to re-rate any time soon
ahead of increasing earnings risk.
Source: AmeSececurities
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