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Tuesday, August 30, 2016

CIMB Research keeps Add call for AirAsia, target price RM4.15

Tuesday, 30 August 2016 | MYT 8:17 AM
CIMB Research keeps Add call for AirAsia, target price RM4.15

KUALA LUMPUR: AirAsia’s first half 2016 core net profit outperformed CIMB Equities Research’s forecasts by about 15%, due to higher-than-expected load factors with yields keeping stable.

“We maintain our Add call and target price of RM4.15, pegged to a CY17 price-to-earnings (P/E) of nine times (peer range six to 12 times), and adding in an expected 96 sen a share special dividend,” it said on Tuesday.

The research house said although competition is heating up, its FY17 forecasts have downside protection as it has a high spot jet fuel price assumption of US$70 a barrel. Key rerating catalyst is the sale of Asia Aviation Capital (AAC) and the expected special dividend.

AirAsia delivered a group core net profit of RM218mil during 2Q16 as a result of the industry capacity rationalisation in Malaysia that was driven mainly by Malaysian Airline’s capacity cuts from August 2015. This continued the trend of healthy profits seen over the past four quarters.

AirAsia has convincingly recovered from the losses suffered in the year before as a result of the QZ8501 crash in late-2014.

Thailand did better on-year due to the strong inflow of Chinese tourists, while Indonesia and the Philippines reduced their losses after they rationalised their fleet and cut loss-making routes. Even India managed to reduce its losses with higher loads and lower unit costs.

“AirAsia reiterated that its sale of 70%-80% stake in AAC is targeted for completion by end-2016, with an equity valuation of at least US$1bil. Assuming AirAsia realises US$800mil from the sale of 80% of AAC, the RM3.2bil proceeds could be declared as dividends,” said the research house.

CIMB Research said the proposed 20% private placement of 559 million new shares at RM1.84 each to its two founders – Tan Sri Tony Fernandes and Datuk Kamarudin Meranun – is now awaiting Bank Negara approval since it will be financed by foreign banks.

It will enlarge AirAsia’s share base to 3.342 billion shares and take the founders’ stake to 32.4%. Hence, the special dividends may amount to 96 sen share post-placement, of which RM1bil will be paid to the two founders, just enough to settle the loans used to subscribe for the placement.

Even though MAS has not increased its narrow-body fleet of 56 737-800s, 15%-20% of its seats are available from August at lower prices in an effort to raise its average loads from 68% to 80%. Meanwhile, Malindo added four 737-800s and two ATR72-600s in July and August after keeping its fleet unchanged during 1H16, with more deliveries expected in the months ahead.

“Our forecasts assume that AirAsia’s base yields will fall 4% in FY17, continuing the 1% decline expected for FY16.

“AirAsia has hedged 73% of its 2H16 fuel requirements at an average strike price of US$56 a barrel of jet fuel, and 43% of FY17’s at US$58 a barrel, giving AirAsia high protection against any unexpected spike in the price of jet fuel for the next 1½ years.

“Our spot fuel price assumption for FY17 is currently at US$70/bbl, but if the spot price remains at the current level of US$56/bbl, our FY17 base yields may be reduced by 6 percentage points (to a decline of 10% on-year) without affecting our current FY17 forecasts,” CIMB Research.

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