AirAsia Bhd - U/G to BUY on three anchors

Author: kltrader   |   Publish date: Mon, 16 May 2016, 10:11 AM 

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Recalibrating forecasts

We upgrade AirAsia to BUY (from HOLD) after considering three factors. First, we incorporate the benefit of new capital injection from the issuance of 559m of new AirAsia shares to Tune Live Sdn Bhd. Second, we tweak up our FY16-18 net profit forecasts by +1.6%, +3.8% and +4.1% respectively on lower interest payments. Third, we switch to global peer average PER as the valuation metric (previously 1x P/BV) as many risk factors have abated. Our new TP is MYR2.50 (from MYR1.80) pegged to 10.8x FY16 PER.

1Q16F core net income of MYR179m?

We forecast 1Q16 core net profit to come in at MYR178.8m (+62.8% YoY, +952% QoQ). This is on the strong operating performance achieved, with 16.9% YoY passenger traffic growth and a load factor of 85.4% — a record performance for the first quarter. The Group will also benefit from a step down in fuel cost as its expensive fuel hedges have expired at the end of 2015. We forecast unit fuel cost will plunge by 39% YoY in 1Q16 to USD54/bbl. At MYR179m core net profit, 1Q16 results would meet expectations at 23%/20% of our/street’s full year forecast.

Upcoming capital injection will ‘change’ things

AirAsia has received shareholders’ approval to issue 559m of new AirAsia shares to Tune Live Sdn Bhd (owned by the founders of AirAsia). This will raise MYR1b for AirAsia, and the exercise should complete in mid 3Q15, in our view. This will lower AirAsia’s net gearing level to 1.8x from 2.3x currently. The founder’s effective control in AirAsia will rise to 32.5%, just short of the 33% mandatory takeover limit. We also think AirAsia’s share buyback programme will be put in the backburner for now.

You have not missed the flight yet

AirAsia has outperformed the KLCI and Bloomberg Asia Pacific Airlines Index commandingly so far this year. But, the stock is still trading at attractive valuations against global peers and it also has one of the better capital structures. It is a quality name worth accumulating.
Source: Maybank Research - 16 May 2016