This article first appeared in The Edge Financial Daily on August 9, 2017

AirAsia Bhd
(Aug 8, RM3.29)
Maintain buy call at an unchanged target price (TP) of RM3.75: We forecast AirAsia Bhd’s second quarter of financial year 2017 (2QFY17) core net profit to be about RM221 million (-19% year-on-year [y-o-y], -17% quarter-on-quarter [q-o-q]). This would take the first half of FY17 (1HFY17) net profit to about RM487 million, or 39% of our full-year forecast, which is consistent with the group’s 40:60 1H:2H profit split. Malaysia performed strongly but the group would have been weighed down by weaker performances in Thailand, India and the Philippines, we believe. The lower y-o-y profit is expected as 2016 was an exceptional year and we remain confident AirAsia is on track to meet our FY17 forecast. No change to our earnings forecasts and TP of RM3.75, based on an unchanged 10 times 2017 price-earnings ratio (PER) (peer group average).

AirAsia has sweated its assets significantly in 2Q17. The average number of flights per aircraft per day was 6.2 times (+10.7% y-o-y, +5.1% q-o-q). This will help to reduce operating costs, specifically on the fixed-cost components. More impressively, AirAsia was able to deliver this without any noticeable deterioration to its on-time performance. There is downside potential to our operating cost forecast assuming AirAsia is able to deliver this impressive level of asset turn sustainably going forward.

The share price has been trading rangebound since the company’s annual general meeting on May 25. The shareholders’ approval for sale of Asia Aviation Capital Ltd (AAC) is at hand, but the actual transaction remains in the womb. Also, the listing of the Indonesian and Philippine associates has been pushed back another year (again) to 2018. It is difficult to pinpoint when exactly transactions will happen as previous predictions have all not materialised. But, when one transaction does transpire, we expect the share price reaction to be swift. At the current share price, AirAsia’s PER and enterprise value/earnings before interest, taxes, depreciation, amortisation, and restructuring or rent costs are the second lowest globally and are also well below their historical averages. Also, we believe that the sale of AAC will happen in 2017 and management will distribute the net proceeds via a special dividend.

AirAsia turned its aircraft at an average of 6.2 times per day in 2Q17. This is an impressive achievement and rivals the best in class globally. Higher asset utilisation is beneficial as it allows the company to amortise its fixed-cost components such as depreciation, administrative expense, aircraft lease over a higher denominator, thus deriving a lower unit cost. This is the hallmark of a quality low-cost carrier. — Maybank IB Research, Aug 7