AirAsia Bhd
(Aug 16, RM2.96)
Maintain buy with an unchanged target price (TP) of RM3.34: We, along with 18 other sell-side analysts, attended a company briefing led by AirAsia Group chief executive officer (CEO) Tan Sri Tony Fernandes, AirAsia Bhd CEO Aireen Omar, and other members of the company’s senior management team.
In all, Fernandes and his team displayed confidence in the company’s prospects. This optimism resonated with us, leading to the reaffirmation of our “buy” call with a TP of RM3.34.
During the briefing, the AirAsia management highlighted various initiatives to grow earnings and address challenges faced by the group. Among them are growing average fares as competitors are showing a reluctance to aggressively expand capacity or discount fares. This could potentially lead to better revenue per available seat kilometre in the second half of financial year 2016 (2HFY16) following the first quarter of FY16’s (1QFY16) strong double-digit growth of 11% year-on-year.
The company plans to expand available seat kilometre by a compound annual growth rate (CAGR) of more than 10% which is consistent with the planned fleet CAGR of 11.1% or 65 aircraft in total over FY16 to FY19.
We do not think this is overly aggressive as young associates AirAsia India and AirAsia Japan will be allocated the lion’s share with a combined 40% of new aircraft. In addition, load factors held firmly above 80% across Malaysia AirAsia and associates, indicating that expansion could be timely.
Cost per available seat kilometre is expected to trend lower going forward with new fleet deliveries consisting of A320neo and A321neo aircraft which consume 15% to 20% less fuel.
Associates Indonesia AirAsia and Philippines AirAsia are expected to perform better, potentially achieving break-even as soon as 3QFY16 and 2QFY16 respectively by focusing on international routes.
The management was clearly upbeat on its leasing arm (Asia Aviation Capital Ltd [AAC]) as well as its private-equity businesses, believing that the market underappreciates the value of these assets. AAC alone which is closest to monetisation could be valued at RM4.1 billion, falling largely in the middle of our RM3.3 billion to RM5.5 billion valuation range derived from extrapolating fleet sizes and market caps of listed peers.
AAC currently manages a portfolio of 55 aircraft with 14 more set to be novated from parent AirAsia Bhd in 3QFY16. It has a new fleet order book of 130 aircraft.
We learnt that AAC will be getting a new CEO and chief financial officer as soon as 3QFY16, providing a leap forward in the process of monetising about a 70% to 80% stake. This could potentially translate into proceeds of RM2.9 billion to RM3.3 billion which could be used to pare debts, fund future expansion and be paid out as special dividends.
The management noted that setting up associates in China and Vietnam could complete its Asian ambitions due to the attractive demographics of these markets. Further inroads into China could be on the cards soon with a specialised team already set up. — MIDF Research, Aug 16