AirAsia Bhd
(Feb 24, RM2.70)
Maintain outperform with an unchanged target price (TP) of RM3.82: AirAsia Bhd’s financial year 2016 (FY16) core net profit (CNP) of RM1.6 billion was within our and consensus expectations, making up 99% and 105% of the estimates respectively. 

While no dividends were declared for FY16, we note that AirAsia typically announces full-year dividends in April. We maintain our FY17 earnings forecast and introduce FY18’s CNP of RM1.49 billion. 

Its FY16 CNP of RM1.6 billion was up 123% year-on-year on the back of a 10% growth in revenue, underpinned by: i) improved load factors (+6 percentage points) albeit an additional growth in capacity of 7%; ii) higher average fares (+10%); and iii) enhanced ancillary income (+5%). In addition, profitability improvement attributed to RM172.8 million contributions from associates, versus FY15’s associate loss of RM866 million. 

Its fourth-quarter FY16 CNP was up 12% quarter-on-quarter, underpinned by a 15% increase in revenue from higher average fares (+13%) which contributed to better yields (+13%) due to the year-end seasonal factor, and lower net interest expense (-48%) as net gearing improved to 1.3 times (from 1.5 times). 

Going forward, we remain positive about AirAsia’s outlook, premised on decent jet fuel cost whereby 75% is hedged at US$60 (RM266.40) in FY17, improving revenue per available seat-kilometre through further improvement in ancillary income per pax of which they aspire to hit RM55 per pax by FY17 and RM60 per pax by FY18 via digital platforms such as capturing user data and providing relevant content to users to induce spending. 

That said, we also remain excited about their monetisation plans, especially the divestment of its leasing arm, Asia Aviation Capital Ltd (AAC), in which final bids are expected by March 27, 2017. 

Besides AAC, management note that plans for further monetisation include listing of the Indonesia and Philippine associates and Asian Aviation Centre of Excellence. 

Post results, we make no changes to our FY17 earnings forecast. We also introduce our FY18 earnings forecast of RM1.52 billion based on a load factor of 86%. 

We reiterate our “outperform” call on AirAsia with an unchanged TP of RM3.82 based on an FY17 price-earnings ratio of nine times. 

We continue to like the stock for its growth potential, competitive advantage in the aviation industry from its low operating costs and a potential special dividend from its divestment of AAC. — Kenanga Research, Feb 24