This article first appeared in The Edge Financial Daily, on March 4, 2016.

AirAsia Bhd
(March 3, RM1.68 )
Maintain outperform with a target price (TP) of RM1.88: AirAsia Bhd reported fourth-quarter financial year 2015 (4QFY15) net profit of RM554.2 million (4QFY14: net loss of RM428.5 million). Excluding one-off items such as foreign exchange gain or loss and tax incentives, AirAsia recorded 4QFY15 core net profit of RM464.1 million (4QFY14: core net profit of RM101.2 million). For full FY15, AirAsia’s core net profit increased by 115% to RM884.6 million from RM411.3 million in FY14. The core net profit was above our expectations, accounting for 145.9% and 142.6% of our and consensus estimates respectively. We maintain our “outperform” call on AirAsia with a TP of RM1.88, pegging a 10 times multiple to FY16F (forecast) earnings (20% discount).

AirAsia reported 4QFY15 revenue jumped to RM2.2 billion (+46.6% year-on-year [y-o-y]) on the back of revenue per available seat kilometre (RASK) surging 39.7% y-o-y to 22.29 sen (4QFY14: 15.95 sen). Average passenger fare increased by 3.5% y-o-y, while ancillary revenue per passenger increased by 4.3% y-o-y. This was due to a 9.6% increase y-o-y of passengers carried during the quarter. We believe the stronger revenue recorded was also mainly because of maintenance service revenue, which was not recognised previously, due to uncertainty in recoverability of the amount. 

It was included in the operating lease income, which increased by 254% y-o-y to RM727.9 million in 4QFY15. Cost per ASK ex-fuel increased by 26.9% y-o-y due to higher aircraft operating lease expenses (+147.6% y-o-y), and maintenance and overhaul costs (+52.6% y-o-y). This is due to the additional 16 sale and leaseback exercises. Net operating profit for FY15 declined by 32.4% y-o-y, mainly dragged down by an accumulated prior-year share of losses from the Indonesian operations.

We expect demand from Chinese travellers to remain strong throughout 2016 on the back of the visa waiver for Chinese nationals to Malaysia, which will help boost tourism activities. Its Indonesian operations will continue to improve the pricing for its international routes and achieve an 80% load as a strategy to turn around. Its Philippine operations are expected to break even by 1QFY16, while AirAsia Japan will recommence its operations in the first half of this year. — PublicInvest Research, Feb 29