Even with an 80% rally this year, RHB analyst Shekhar Jaiswal said in a note today that AirAsia’s valuation was still attractive against its peers, as he expects the group’s recurring net profit to triple in the financial year ending Dec 31, 2016 (FY16), with lower jet fuel prices.
“We also expect a benign competitive environment, capacity discipline by Malaysian carriers, and lower losses from its (AirAsia) Indonesia and Philippines associates. (However), profits in FY17 is expected to fall amidst a rise in jet fuel prices, which remain largely unhedged,” he summarised in a note today.
Shekhar noted that Malaysia’s AirAsia’s load factor of 85% in the first quarter this year was even higher than the preceding quarter, where fourth quarters are seasonally a strong quarter.
With improved demand supported by capacity cuts by Malaysia Airlines Bhd (MAB), and unchanged capacity by Malindo Airways Sdn Bhd, AirAsia managed to notch higher yields for its Malaysian operations in the fourth quarter of 2015, he said.
“While yield improvements may continue in 1H16 amidst unchanged demand supply situation, we estimate Malaysia AirAsia’s full-year load factor at 80% and a yield expansion of 1% only. This is because we expect strong capacity expansion by Malindo in the second half of 2016,” he said.
Shekhar said RHB expects the low oil price environment to be the key factor driving earnings growth this year, where three quarters of AirAsia’s fuel this year were hedged at US$54 a barrel, which he noted was “significantly below last year’s average fuel price”.
This leads to RHB estimating AirAsia’s fuel expenses’ share in pre-earnings before interest, taxation, depreciation, amortisation, and rent cost’s (EBITDAR) operating costs to drop by seven basis points to 38% this year.
However, Shekhar said AirAsia’s FY17 earnings might decline because of higher jet fuel costs, given the research house’s estimates based on the premise that the LCC does not aggressively lock in new hedges.
According to RHB’s estimates, AirAsia’s net profit in FY17 will be RM903 million, down roughly 14% from the projected RM1.05 billion for this year.
But for FY16, RHB projected AirAsia Indonesia will significantly lower its losses to RM55 million, from RM332 million last year. Its Philippines associate meanwhile, will cut its losses to RM7 million in FY16, a fraction of the RM78 million loss last year. Nonetheless, AirAsia India and Japan AirAsia will continue to make operating losses, given stiff competition and higher operating costs.
“Compared to street, we are more conservative in forecasting a recovery in earnings contributions from the struggling associates,” said Shekhar.
All in all, with an estimated earnings per share (EPS) of 34 sen for FY16, he said there could be some upside to AirAsia at the current level. The target price of RM2.80 is 8.3 times the estimated EPS for FY16, and 1.5 times its net asset value.
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