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AirAsia Bhd
(Nov 11, RM2.59)
Maintain “buy” with target price (TP) of RM3.20:
Malaysia AirAsia’s (MAA’s) revenue passenger kilometres (RPK) grew by only 2% year-on-year (y-o-y) in the third quarter of 2014 (3Q14).But this still managed to drive its load factor up by 0.5 percentage points (ppt) y-o-y, as available seat kilometres (ASK) growth was more tepid at 1% y-o-y.

Thai AirAsia’s (TAA’s) traffic growth was more decent, as RPK grew by 7% y-o-y in 3Q14. But, its load factor fell1.2 ppts y-o-y, on account of the faster ASK growth of 8% y-o-y. Both MAA and TAA’s statistics are in line with our expectations.

Indonesia AirAsia (IAA) and Philippines’ AirAsia (PAA’s) statistics were more disappointing. IAA’s RPK fell 12% y-o-y, on the back of a 17% cut in ASK in 3Q14.

PAA saw its load factor fall 4.2 ppts y-o-y in 3Q14, as RPK declined 20% y-o-y compared to the 14% y-o-y decline in ASK.

Using ASK/aircraft as a proxy, we find that MAA’s aircraft utilisation fell 17% y-o-y in 3Q14.

The key reason for this are 12 planes earmarked for disposal, which have been grounded but remain unsold. Management now intends to put these planes back into service in 4Q14.

We believe this could be driven by difficulty in getting buyers for old aircraft and the drastic withdrawal (20% in 3Q by our estimates) of domestic capacity by Malaysia Airlines (MAS) which presents an opportunity for AirAsia.

Excluding exceptional items, we expect AirAsia’s bottomline to range between a RM3 million loss and RM59 million profit in 3Q14.

Consensus downgrade is almost a certainty (45% higher than our estimate).

Despite the current weakness, we retain our “buy” rating on AirAsia. Investors should ignore the financial year 2014 earnings, and focus on the bright earnings prospects going forward.

Low oil prices are set to stay, competitive pressures should normalise (with the restructuring of MAS), and Thailand tourism growth is recovering.

All these factors point to a better 2015 for AirAsia. — Alliance DBS Research, Nov 11.

AirAsia_theedgemarkets

This article first appeared in The Edge Financial Daily, on November 12, 2014.

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