(Oct 21, RM2.36)
Upgrade to trading buy with higher target price of RM2.57: Recently, the price of jet fuel has dropped significantly to US$100 (RM326) per barrel (bbl), in line with the plunge in the global crude oil price, on a major increase in oil production (supply) with subdued global demand (especially concern about the slowdown in the eurozone and China).
We expect the price of jet fuel to remain at around the current level for the fourth quarter of 2014 and for financial year 2015 (FY15) and FY16.
A lower jet fuel price is beneficial to AirAsia, given jet fuel contributed 60% to 67% of its operational cost.
However, we believe AirAsia will cut its average yield (including fuel surcharges), in order to induce air travel in the current weak demand environment. For every 5% change in jet fuel cost, AirAsia’s earnings per share (EPS) will change by 11.9% in FY15 ending Dec 31 and 9.3% in FY16. Note that the price of jet fuel has dropped by 20% year-to-date.
Major components of AirAsia’s cost structure (that is jet fuel, maintenance, leasing, interest and so on) are denominated in US dollars. Hence, a strengthened greenback will worsen AirAsia’s bottom line. For every 5% change in the exchange rate, AirAsia’s EPS will change by 18.3% in FY15 and 14.6% in FY16. Note that the US dollar is currently at the same level as end-2013 against the ringgit.
With the recent air incidents (MH370 and MH17), kidnapping incidents as well as regional country issues, the demand for air travel has been affected considerably despite the low-yield environment.
We expect yields to remain depressed in the near term as the overall demand recovers to match the ongoing system capacity adjustments.
After imputing for potentially lower yield, lower jet fuel cost and higher US dollar, we have increased FY15 and FY16 earnings by 2.8% and 5%.
Upgrade to “trading buy” with higher target price of RM2.57 (from RM2.20) after imputing 10% discount to sum-of-parts (from 20%), given lower concern about major overcapacity in the system as Malaysian Airline System Bhd is restructured. — HLIB Research, Oct 21
This article first appeared in The Edge Financial Daily, on October 23, 2014.