Current price (MYR): 2.20
Target price (MYR): 2.80
Cheap Relative to Peers
Over punished, stock offers value. AirAsia’s 9M13 core net profit was down by 15.5% YoY due to the intensifying competition across the board. The share price has fallen 19.7% in 2013. We think this is overdone and the stock is in deep value compared to global peers based on PER and adjusted EV/EBITDAR metrics.
Malindo has changed the equilibrium. Malindo’s entry has structurally raised the competition whereby yields and profit margins will be lower than pre-2012 levels. MAS and AirAsia have over reacted with cut throat fares. The industry will learn to accept that Malindo is here to stay, and will then focus on their core markets and compete rationally going forward.
AirAsia is deploying modest capacity in 2014. It plans to deploy four aircraft in 2014 (constant to 2013), which translates to capacity growth of 6%-7%. This is modest by AirAsia’s standards and this is a protective measure to balance out the supply-demand and provide platform for yield growth. We are positive on this strategy.
2014 will be supported by associates. We think that the Malaysian operations will recover and generate 9.2% profit growth YoY. The operations in Thailand and Indonesia should do much better due to expectations of higher yields and improving operating cost. Other associates such as AirAsia-Expedia, AirAsia-CAE have reached scalability and churning strong profits.
Foreign foray will continue to be loss making. AirAsia’s foray in Philippines and India, will continue to be loss making in 2014. It has yet to reach critical size and will continue to incur start-up losses. We think it will take another 2-3 years – at least, for the new startups to start contributing to the Group. We are undeterred with the start-up losses, given that the long-term benefits significantly outweigh the risks.
Maintain BUY. We keep our earnings forecasts and target price of MYR2.80/share unchanged. AirAsia is expected to deliver respectable earnings growth of 14.9% in 2014 and 5.9% in 2015 respectively. The markets will soon take notice of this and re-rate the stock accordingly
Publish date: 02/01/14