Thursday, January 2, 2014

AirAsia - Time For Bottom Fishing (RHB)

AirAsia -
Time For Bottom Fishing

We  find  the  sharp  selldown  on  AIRA’s  shares  excessive  as  we  see  a positive  FY14  earnings  outlook,  bolstered  by  easing  competition  and cost efficiencies kicking in once KLIA2 opens for operation. Hence, we maintain our BUY call and MYR3.70 FV, based on a 12x target FY14 P/E. At the current FY14 P/E of 7.1x, we view the stock as a bargain.

Selling pressure. AIRA’s share price has retreated by about 12% since the low cost carrier released its 9M13 results. We think the selldown has been  excessive  and  was,  in  part,  exacerbated  by  the  US  Federal Reserve’s  move  to  start  scaling  back  on  its  quantitative  easing  (QE) programme. We note that AIRA’s foreign shareholding has fallen to 49% as at end-November from 52% in 1H13. In our opinion, the  selldown by foreign shareholders may have bottomed, noting that the previous low in late Nov 2012 was 49%.

What’s brewing at Malindo Air. Recent news reports said Malindo Air’s owners  –  Indonesian  billionaire  Rusdi  Kirana  (Lion  Air  owner)  and National Aerospace Defence & Industries  (NADI) – have fallen out, and that the latter may pull out  from the business. We note that  Malindo Air has denied any conflict among its shareholders.

Competitive pressure eases. We expect 2014 to remain a challenging year  as  Malindo  Air  continues  to  spread  its  wings,  but  we  think  the carrier may ease up on the aggressive price competition  due to its high cost structure. Carriers in Malaysia are likely to focus on cost savings in FY14,  but  this  is  not  new  for  AIRA,  as  cost  control  is  instilled  in  its corporate  culture.  Should  both  Malindo  Air  and  Malaysia  Airlines  (MAS MK,  NEUTRAL,  FV:  MYR0.30)  adopt  a  more  conservative  approach  in their expansion plans and pricing strategies, this will limit the downward pressure on AIRA’s yields.

Promising  earnings  outlook,  BUY  maintained.  We  believe  the earnings outlook remains promising for AIRA as competition wanes and as  its  cost  structure  improve  further  when  KLIA2  commences  in  FY14. We  maintain  our  BUY  call  on  AIRA,  with  our  FV  intact  at  MYR3.70, based on an unchanged FY14F target P/E of 12x vs its current FY14 P/E of  7.1x.  Incorporating  the  market  cap  of  the group’s listed  entities  and valuing  its  unlisted  Indonesia  unit  at  10x,  the  Malaysian  unit’s earnings are valued at an FY14 P/E of only 5.2x.

Recent Developments
Selldown overdone. AIRA’s share price was bashed in the recent selldown, and has fallen  by  12%  since  it  announced  in  November  its  9M13  earnings,  which  we  had highlighted were better than we anticipated given the intense competition. Thanks to the airline’s  focus  on  cost  control,  we  note  that  its  EBITDA  has  risen  2.8%  YTD. Hence, we are of the view that the selldown was unjustified, and was partly sparked by  market  nervousness  over  further  QE  tapering  by  the  US  Federal  Reserve.  The selling  resulted  in  AIRA’s foreign  shareholding  shrinking  to 49%  from  52%  in  1H13. Based  on  past  trends,  we  think  the  selldown  may  have  bottomed,  as  49%  was  the lowest  foreign  shareholding  in  AIRA  back  in  Nov  2012  when  its  share  price  was hovering at around MYR2.90.

What’s going on at Malindo Air. Recent news reports said Malindo Air’s owners – Indonesian billionaire Rusdi Kirana  and its local JV partner, NADI – have fallen out, and that this may result in the latter exiting the business. However, we also note that Malindo Air recently denied that there was any shareholding conflict between the two shareholders.  We  believe  that  NADI  may  have  been  unhappy  that  Lion  Air  did  not send  its  fleet  to  AIROD  Malaysia  for  maintenance,  repair  and  overhaul  (MRO)  as agreed  under  the  MRO  deal  between  the  two  partners.  AIROD  is  a  subsidiary  of NADI.

Should  NADI  pull  out,  Lion  Air  will  need  to  find  a  new  local  investor  to  maintain Malindo  Air’s  air  operator’s  certificate  (AOC)  to  ensure  it  remains  in  operation. Although  a  change  of  local  ownership  will  not  affect  the  AOC,  this  may,  however, impact Malindo’s air service licence (ASL). An ASL is mandatory in order to operate scheduled services, without which the only service that Malindo Air will be allowed to offer would be charter aircraft services or an unscheduled flight service.

The Present Competitive Environment
Competition  is  on  the  wane.  We  expect  2014  to  remain  a  challenging  year  as Malindo  Air  continues  to  spread  its  wings,  but  we  think  the  carrier  will  be  less aggressive due to its high cost structure. We also believe Malindo Air is still incurring losses, as we notice that its airfare discounts have narrowed considerably and it has cut back the capacity on some routes. In some  instances, Malindo Air’s flights were cancelled  and  consolidated  into  the  next  flight  to  ensure  sufficient  loads.  We understand that this is already the norm for Lion Air in its home country of Indonesia.

All  said,  the  delivery  of  Malindo  Air’s fleet so far (it currently has six narrow-bodied aircraft) has been below its initial target of 12 aircraft. The carrier has also adopted a new strategy of expanding to regional routes, such as Indonesia, Bangkok and India, as  opposed  to  competing  for  a  share  of  the  domestic  market  in  view  of  the  stiff competition.  Comparatively,  MAS  appears  to  be  sticking  to  its  aggressive  pricing strategy, but we are of the view that this is a greater concern for AIRA.
AIRA to benefit as competitors get serious on cost discipline. We believe FY14 will  be  a  year  in  which  carriers  will  cut  costs  to  improve  their  profitability.  However, this is nothing new for AIRA as the cost awareness has long been imbued in carrier’s corporate  culture.  More  importantly,  should  Malindo  Air  and  MAS  get  more conservative  in  their  future  expansion  plans  and  pricing  strategies,  the  downward pressure on AIRA’s yields will dissipate.

Earnings Outlook
KLIA2 to be a catalyst for  AIRA. Premium passengers who have been hesitant to depart from the LCCT, due to the inconvenience and the uncomfortable environment, will likely change their minds when KLIA2 opens. Moreover, the rail link between the main  KLIA  terminal,  KLIA2  and  Kuala  Lumpur’s  KL  Sentral  station  will  also  lure premium  passengers  to  AIRA,  given  the  carrier’s  higher  flight  frequencies  and punctuality. This will be positive in providing upside to overall passenger yields.
In  fact,  AIRA  has  taken  the  opportunity  to  offer  a “Hi  Flyer” scheme tailored to the needs of business and premium passengers that provides the flexibility of flight timing and  express  boarding.  We  understand  that  this  extra  service  offering  has  led  to strong take-ups from the business community.

Capacity outlook. YTD, AIRA has taken delivery of 11 aircraft (five delivered in Dec 2013 alone), which is in line with our assumption of an average of six new aircraft for FY13.  We  conservatively  expect  AIRA  to  take  delivery  of  four  aircraft  in  FY14  and three in FY15.

In  total,  the  AirAsia  Group  is expected  to  take  delivery  of  31  aircraft,  although most would  be  deployed  to  its  associates.  As  such,  AIRA  will  reap  the  benefits  of  higher lease  rental  income,  which  we  assume  would  grow  by  18%  and  10%  for  FY14  and FY15  respectively.  With  loads  expected  to  hover  at  78%  for  FY14-FY15  (down  by 1ppt from our FY13 assumption), we expect AIRA to see its revenue passenger km (RPK) grow by 7% and 5% respectively. This is a fairly conservative assumption.

Yield outlook. While there may still be pressure on airfare yield, which we expect to drop by 1% y-o-y in FY14, this will be mitigated by the higher ancillary revenue that AIRA is expected to rake in, notably from the recent revision of its baggage weighing structure  and  new  ancillary  initiatives  launched,  such  as  “Hi  Flyer”  (which  will  make full-year impact in 2014) and new “Fly Thru”, pairings as new route offerings from its associates.

AIRA’s baggage revision and stricter passenger inspection of  cabin  luggage  have enabled  the  carrier  to  garner  the  highest  baggage  revenue  per  pax  collected  in 3Q2013  of  RM21.30/passenger.  This  could  come  in  substantially  stronger  in  the
upcoming 4Q.

Other new initiatives include onboard Wifi and more onboard duty-free inventories. All in,  we  expect  AIRA’s  overall  yields  to  come  on  lower  by  a  mere  0.4%  (to  18.67 sen/RPK)  and  1.1%  (to  18.45  sen/RPK)  for  FY14  and  FY15  respectively.  This  will see  the  carrier  posting  revenue  growth  of  7.7%  and  5.1%  respectively.  In  9M13, AIRA saw its overall yields drop 4.3% YTD to 18.3 sen/RPK (3QFY13: -9.7% y-o-y to 18.05 sen/RPK).

Setting up new domestic hubs. AIRA will also focus on building new hubs such as in Kota Bahru and Penang, which have recorded better than expected loads. This will allow the carrier to fly to more new routes and improve aircraft utilisation as well as improve yields.

Higher  earnings  from  associates  moving  forward.  AIRA  collectively  booked  in total  earnings  of  MYR28.4m  from  associates  in  9M13  vs  MYR17.5m  in  FY12.  This was largely due to its exit from Japan, as well as improved profitability at Expedia and AirAsia  CAE Academy.  Moving  into  2014,  we  expect  associate  earnings  to  improve to  MYR160m  (from  MYR88m  in  FY13)  due  to  higher  contribution  from  Thai  AirAsia and Indonesia AirAsia, as well as lower losses from the Philippines.

Cost Initiatives
Jet fuel. Jet fuel prices have been relatively flat, and moving forward, we expect it to remain so in FY14, although a slight increase in FY15 could be expected. Hence, we do not see higher jet fuel prices posing a significant threat to AIRA’s earnings.

KLIA2 to further bring down costs. We are also positive on the commencement of KLIA2 in relation to improving aircraft turnaround vs the current congestion at LCCT. AIRA  believes  its  costs  will  continue  to  improve  on  potentially  lower  fuel  burn  when KLIA2 opens. Furthermore, the automated baggage handling system installed at the new  airport  –  and  the  recently  implemented  self-baggage  tagging  system  –  are expected to lead to lower ground and baggage handling costs.

Reducing  flight  distance  to  lower  fuel  consumption.  In  its  efforts  to  improve efficiency,  AIRA  will  be  the  first  carrier  in  Malaysia  to  fly  the  Required  Navigation Performance  Authorisation  Required  Approach  (RNP-AR  APCH)  flight  paths. Adoption  of  RNP-AR  APCH  can  potentially  shorten  the  flight  distance  of  an  aircraft and,  hence,  reduce  fuel  burn.  This  procedure  will  also  help  air  traffic  controllers reduce  events  such  as  flight  delays  as  well  as  alleviate  air  traffic  congestion.  AIRA has  been  collaborating  with  GE  Aviation  and  DCA  on  the  nationwide  flight  path programme since 2012 to improve operating efficiency at 15 local airports.

Sensitivity Analysis
Highly  sensitive  to  yields.  Carriers’ earnings  are  highly  sensitive  to  yields.  For  a one  sen  change  to  our  base-case  yield  assumption,  earnings  would  swing  by MYR20.4-20.8m  for  FY13/FY14  and  MYR11.4m  for  FY15.  This  approximates  to roughly 3/2% and 1% in earnings respectively.

Cost sensitivity. With jet fuel costs accounting for 44% of AIRA’s total costs given its low  cost  model,  a  USD1  revision in jet fuel  price  from  our  base case assumption of USD130 for FY13/FY14 and USD135 for FY15 would change our earnings by some MYR15-18m (or 2% of earnings).

Valuation and Recommendation
Maintain  BUY. We  maintain  our  BUY  call  on  AIRA  with  our  FV  intact  at  MYR3.70, premised  on  an  unchanged  target  FY14  P/E  of  12x.  Including  the  market  cap  of  its listed  entities  and  valuing  its  Indonesia  unit  at  10x,  the  Malaysian  unit’s  FY14 earnings are valued at a P/E of only 5.2x. AIRA is currently at an attractive FY14 P/E of  7.1x  vs  peer  average  of  11.4x  (a  38%  discount),  and  its  long-term  historical average of 9x. To add to its allure, the stock also offers a dividend yield of 3.3%.

Source/Extract/Excerpts/来源/转贴/摘录: RHB-Research,
Publish date:30/12/13

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