This article first appeared in The Edge Financial Daily on May 29, 2017

AirAsia Bhd
(May 26, RM3.05)
Maintain hold with a target price of RM3.51: AirAsia Bhd has consolidated Malaysia AirAsia (MAA) with Indonesia AirAsia (IAA) and AirAsia Philippines (AAP) for the first time ever and we name this combination “MIP”. Thailand, India and Japan remain equity accounted. Unfortunately, MIP delivered 62% lower core earnings on its debut. Passenger revenues, in fact, rose an impressive 9.7% year-on-year (y-o-y), with available-seat-kilometre capacity growing 2%, the load factor up 4% y-o-y leading to a 6.8% rise in revenue-passenger-kilometre demand and yields improving 2.7% y-o-y. It was costs that hurt profits.

Overall cost per available seat kilometre rose 22% y-o-y due to a 20% rise in fuel prices, a 6% appreciation of the US dollar (which impacted some 60% of MIP’s costs), a pilot and staff wage hike of around 25%, and a non-recurring cost to move to AirAsia’s new headquarters. Without the moving cost, AirAsia’s numbers for the first quarter of financial year 2017 (1QFY17) would be on track to meet our full-year forecasts.

We estimate that MAA’s core net profit fell 48% y-o-y, although without the moving cost, the drop was “only” 15%. We calculate that IAA and AAP suffered a core net loss of RM58 million in 1QFY17, compared to a profit of RM10 million a year ago. Thailand’s core profit fell 41% due to increased yield pressures in the Indochina market and the inability to fully pass on the excise tax on fuel uplifted for domestic flights. India’s losses increased 10-fold to RM10.5 million on substantial cost pressures offsetting the positive revenue momentum.

We had already forecast a 32% drop in FY17 earnings earlier on the back of an expected drop in yields. However, instead of yield pressures, AirAsia experienced cost pressures instead. Our new forecasts are for a 41% fall in FY17 core net profit and, coupled with a 20% rise in the share base post the private placement to founders Tan Sri Tony Fernandes and Datuk Kamarudin Meranun that was completed on Jan 26, we are anticipating a 51% decline in FY17 core earnings per share from the record profits in FY16.

AirAsia said at its analyst call that it had narrowed down to the final two bidders for its leasing arm Asia Aviation Capital Ltd, and that a winner would be announced soon. We maintain our view that all, or substantially all, of the proceeds (which we expect to be US$1 billion [RM4.27 billion] or more) will be paid as special dividends, which we estimate at some RM1.12 per share. As such, AirAsia’s share price may see buying support on dips despite the weak 1QFY17 numbers.

We expect AirAsia’s share price to come under much more selling pressure after the special dividends since competition is expected to escalate. After taking 15 new planes in FY16, Malindo is planning to take at least 10 deliveries this year, comprising three 738s delivered in 1QFY17, four 737 MAXs in 2QFY17 and three A330s in 4QFY17. In the medium term, we are also concerned about AirAsia’s rapid expansion into Vietnam, China and Japan before even bedding down IAA, AAP and India. — CIMB Research, May 26