The Kitchen Is Hot
HOLD on fair valuation. The Malaysia aviation sector’s average return of -5.4% YTD has underperformed KLCI’s return of +5.7%, due to depressed earnings, surging fuel prices and heightened competitive pressures. The underlying demand remains positive, as seen by the healthy traffic growth of 15.5% YoY in 8M13 but this was spurred by lower average fare. The yield outlook remains weak and the fuel price is on an uptrend. We however maintain our Neutral stance on the sector as we feel the valuations aptly manifest the current market situation.
Traffic growth second highest in Asia Pacific. In 8M13, passenger traffic growth in Malaysia was 15.5% YoY, making it the second highest in Asia Pacific next only to Thailand which recorded a growth of 16.8% YoY. The robust growth is attributed to the entry of Malindo Air on 22 Mar 2013 and it has grown swiftly to a fleet size of nine aircraft. AirAsia, AirAsia X and Malaysian Airlines (MAS) have also deployed significant capacity growth. The market has managed to absorb the capacity growth positively; both AirAsia and AirAsia X have maintained flattish load factors whilst MAS managed to boost its load factor by 6.6ppt YoY to achieve a historical record of 80.4% in 2Q13.
However, yields have collapsed. Our forewarnings of a fare war is vindicated as both AirAsia and MAS have reported significant yield declines of -7.8% YoY and -8.4% YoY respectively in 2Q13. AirAsia X enjoyed a yield growth of +10.5% YoY, but this was due to the absence of loss making routes to Europe and India that were ceased earlier in the year. Everyone is fixated in maintaining its market share and is adhering to the “load active, yield passive” strategy. Malaysia’s yield decline in 2Q13 was much more severe as compared to the regional average of 3%-4% yield decline and is unlikely to abate anytime soon.
Challenging outlook. Traffic growth is expected to remain robust for the remainder of the year buoyed by firm aircraft deliveries by all the major airlines. Yields will likely remain soft, but the quantum of decline should be less severe as compared to 2Q13. Cost pressures are mounting, namely the uptrend in fuel price, escalating interest rate and weakening MYR against the USD.
Fair valuation underpins our Neutral call. AirAsia, MAS and MAHB are trading at fair value territory vs other airlines in the region based on PER and EV/EBITDA/R basis. AirAsia X is our sole BUY in the sector due to expectation of business turnaround and strong profit growth.
AirAsia (HOLD, TP: MYR2.95): The current price war has proven that a newcomer like Malindo can ruffle feathers. The keyword now is staying power. AirAsia is the most robust airline in the country thanks to its efficient low cost operations and a strong balance sheet. It will ultimately endure and prosper when the industry consolidates, but its profits will suffer in the interim. The stock has derated and we believe it is in neutral territory at the moment. When the industry consolidates – which it has to at some point, AirAsia will be the major beneficiary, in our view.
AirAsia X (BUY, TP: MYR1.30): AirAsia X is benefitting from the strong market demand for long-haul, low cost travel. The Company has a very lean and well managed route network as it terminated all its loss making routes at the end of 2012. It had successfully achieved a business turnaround with a profit of MYR12.0m in 1H13, versus a loss of MYR30.7m in the same period last year. AirAsia X is the smallest airline among the industry and its capacity growth plans in 2013 are manageable, in our view. Furthermore, all its routes are international bound with average level of competition and we think AirAsia X is the least affected by the current price war that is plaguing the industry.
Malaysian Airlines (HOLD, TP: MYR0.35): MAS is still in loss making territory, but is making tangible improvements as seen by its record load factor and better aircraft utilization. Unit cost has declined by 6% since 2012, and MAS is now cashflow positive. However, much of this success is due to fare dumping to spur traffic growth and raise its popularity profile. MAS is now trying to tackle and overturn the yield decline issue. We keep the stock at a HOLD, as there is little upside to our target price of MYR0.35/share.
MAHB (HOLD, TP: MYR7.20): The current competitive environment at the airlines and robust traffic growth are all music to MAHB’s ears. However, we note that MAHB is trying hard to keep its cost intact due to the delays in KLIA2 and is bearing the brunt of higher than optimal headcount. Due to this, we think that MAHB’s profit growth will be lower than its revenue growth in the short term. The stock is a HOLD, as it is close to our DCF derived target price of MYR7.20/share.
Publish date: 03/10/13