This article first appeared in The Edge Financial Daily on March 5, 2018
KUALA LUMPUR: AirAsia Bhd is probably the best performing aviation stock in the past two years, during which its share price has tripled.
The low-cost carrier’s strategic move to unlock asset values, on top of strong earnings growth has shareholders on cloud nine. The good news last week was that AirAsia is expected to declare a special dividend after it has sold its aircraft leasing business for over RM4 billion. By the same token, the share price rally has left investors pondering whether it is time to lock in some profits.
When contacted, aviation consulting firm Endau Analytics founder Shukor Yusof told The Edge Financial Daily that while prospects for AirAsia to grow bigger in future remains bright, he would still opt to take some profits if he were an investor of AirAsia shares. “AirAsia will grow. It is the biggest player in the region and there is a lot of potential still in the Asia-Pacific. But the gains might not be as big as in the past as the market has changed and become more competitive. If I am a portfolio manager, I would cut my holdings [in the] near term,” he said.
MIDF Research analyst Danial Razak, who has a “buy” call and a target price of RM4.80 on AirAsia, commented that the airline has bright prospects given its long-term strategic plan of monetising assets while crystalising its efforts to enhance the group’s core business which will strengthen its low-cost carrier (LCC) brand in the global market. “While we see the Asia Aviation Capital Ltd’s (AACL) sale [of assets] will result in revenue lost from the leasing business, which represents a fifth of the group’s total revenue, we opine its aggressive growth in other routes in China and India will sustain its current revenue generation capability,” he wrote in a research note last Friday. He also expects the string of divestments in AirAsia to continue driving excitement among investors over special dividends in time to come.
According to Bloomberg, out of 23 research houses that cover AirAsia, 14 of them have a “buy” call on the counter, with seven having “hold” calls, and the remaining two having “sell” calls. Their target prices are in a rather wide range of between RM2.90 and RM6.30. Meanwhile, in a research note dated Feb 28, JPMorgan analyst Mak Hoy Kit expressed concern that the aggressive capacity expansion among industry players may hurt AirAsia’s profitability moving forward. “Adjusted fourth quarter ended Dec 31, 2017 (4QFY17) results were in line with expectations. However, our non-consensus concerns are playing out, with about 5% year-on-year fall in average fare driven by aggressive capacity expansion, likely to continue into 2018, which could trigger a derating, in addition to higher oil prices,” he said.
“Following the 33% year-to-date share price rise, outperforming the (FBM) KLCI Index by 29 percentage points, AirAsia is trading at 9.1 times 12-month forward adjusted enterprise value-to-earnings before interest, taxes, depreciation, amortisation and restructure or rent costs, 15% above the historical average and at a 30% premium to global LCC peers, which is expensive, in our view, given AirAsia’s 2018 estimated return on equity of 15% versus the global LCC average of about 20%. We advise investors to book profits,” Mak wrote.
He pointed out some key catalysts to AirAsia’s share price, such as ancillary revenue growth accelerates, rising earnings contribution from associates, new joint ventures (JVs) in other markets, unlocking of value in associates, and stronger ringgit.
According to AirAsia’s annual report for financial year ended Dec 31, 2016, management guided that apart from already divested Asian Aviation Centre of Excellence (AACE) and ongoing divestment of AACL’s aircraft leasing businesses, other potential monetisation target could be 25%-owned online travel site operator AAE Travel Pte Ltd, 69.33%-owned Think Big Digital Sdn Bhd (a JV with Canada-based loyalty management company Aimia Inc), 80%-owned T&Co Coffee Sdn Bhd, and wholly-owned BigPay Malaysia Sdn Bhd.