AirAsia Bhd
(Dec 10, RM2.73)
Maintain “buy” with a higher target price (TP) of RM3.70 from RM2.94. Crude oil price eased to US$66.84 (RM232) per barrel, 34% below its year-to-date average after the Organization of the Petroleum Exporting Countries (Opec) recently decided to retain its production output. Concurrently, jet fuel price eased to US$80.92 per barrel. Our house forecast assumes a benchmark Brent crude price of US$80 per barrel for financial year 2015 (FY15). Travel demand could be impacted in light of the goods and services tax imposition in April 2015. Nonetheless, we expect air ticket prices to ease due to lower fuel costs hence this could in turn spur travel demand.

Assuming a three-year historical average jet fuel price premium to Brent crude of 13%, we have assumed jet fuel price of US$90 per barrel for FY15. We believe this is reasonable, as it is still 21.5% below FY14 average price of US$114 per barrel but higher than the current spot price of US$81 per barrel. This bodes well for AirAsia as we estimate jet fuel cost constitutes 51% of its direct cost. Our sensitivity analysis indicates that, all other things being equal, a US$10 per barrel drop in jet fuel price will boost profit after tax by +17.3%.

Consequently, we upgrade FY15 earnings to account for lower jet fuel price and improving load factor but this is partially offset by a 4% reduction in average fare yields and higher US dollar/RM rate of RM3.40.  AirAsia is also one of our top picks for FY15. — MIDF Research, Dec 10

This article first appeared in The Edge Financial Daily, on December 11, 2014.