Friday 29 Mar 2024
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KUALA LUMPUR (Jan 31): AirAsia Bhd's financial years 2017 to 2018 earnings is likely to be affected by weaker ringgit and increased cost of jet fuel, but it will still pay out its special dividend, according to a note released by CIMB Research today.

The ringgit dropped to a low of RM4.50 against the greenback in late 2016 and is now at RM4.43. According to CIMB Research, 50% of Malaysia AirAsia's operating costs are US dollar denominated and 40% of its US-dollar-denominated aircraft loans are unhedged.

"Meanwhile, competition is likely to become fiercer, based on our tally of aircraft capacity additions by Malaysian carriers, and this could impact yields," the firm added.

The research house reduced the group's forecasts for the next two financial years, but noted that the sale of the group's stake in the Asia Aviation Capital Ltd is progressing and expects a special dividend will be paid.

"In mitigation, AirAsia has hedged 50% of its US-dollar-denominated operating costs for [first half of 2017] (1H17). Every 10 sen strengthening of the US dollar will reduce our FY17F EPS forecast by 3%. Spot jet fuel prices averaged only US$49.50/bbl (RM219.26/bbl) in FY16F, down from US$67.60/bbl in FY15, driving AirAsia's strong financial performance during its cumulative nine months of 2016 (9M16)," it said.

However, jet fuel prices have risen to an average of US$65 per barrel since the start of 2017, compared with just US$49.50 per barrel in financial year 2016.

"Thankfully, AirAsia has hedged 74% of its FY17 consumption at US$60 per barrel, which will cushion the impact. Every US$5 per barrel increase in the spot price of jet fuel will reduce our FY17 earnings per share (EPS) forecast by 5.7%," it added.

The firm said AirAsia and Malindo Air are planning to aggressively expand their aircraft fleets, which will lead to fiercer price competition.

"We have assumed a 5% yield reduction in FY17 (from 2% reduction previously) and a 2% yield increase in FY18 (from a 5% increase previously)," it added.

The firm predicts a 30% hike in landing charges from Jan 1, 2018 and thus reduces its financial year 2018 EPS forecast by 2%.

"From Jan 1, 2017, MAVCOM (Malaysian Aviation Commission) raised passenger service charges (PSC) but AirAsia was only modestly affected as most of its capacity was within ASEAN and ASEAN PSCs only increased from RM32 to RM35," it said.

According to the firm, from Jan 25, 2017, airlines in Thailand that uplift fuel for domestic flights will be charged higher rates of excise duties, thus reducing profits by 50% to 60%.

"All the above challenges mean that FY17 core earnings are expected to be more than 40% lower than the peak earnings of FY16,"

"Nevertheless, we retain our Add call as we are optimistic that AirAsia will seal the deal to sell Asia Aviation Ltd and pay at least RM1.03 per share in special dividends. Without the dividends, our underlying valuation is RM2.93 per share," it added.

At 11.01am, AirAsia rose 2.42% or 6 sen to RM2.54 with 9.56 million shares traded.

 

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