AirAsia Bhd
(April 3, RM2.29)
Maintain buy with a target price  (TP) of RM3.30: Japan, China and South Korea have imposed a ban on airlines registered in Thailand due to poor safety records. Based on details of the ban, Thai airlines cannot increase the frequency of their existing routes or add new routes (including chartered flights) to these countries. We believe that Thai AirAsia Co Ltd’s (TAA) growth plan will be affected by the ban. TAA has planned for the delivery of an additional five new Airbus A320s this year, which will be deployed on hot routes (China — Beijing, Shanghai and Shenzhen; Japan — Tokyo and Osaka; South Korea — Seoul and Busan), given the strong recovery of the tourism industry.

At the moment, the AirAsia management has not altered its existing fleet deployment plan to TAA, as TAA expects the ban to be temporary (currently the Thailand government is aggressively pursuing ramifications to lift the ban through enhanced safety procedures). Alternatively, TAA could redeploy the additional planes to other high demand destinations such as Asean and India.

We do not expect the ban to be prolonged, given the significance of the tourism industry in Thailand. Furthermore, the Thai government has pledged to ensure agreements with these three countries will be met to satisfy its stakeholders.

We are relatively negative on the ban, which may impair the potential growth of TAA in the short term. The main risk is a prolonged ban. However, we are not overly concerned about the utilisation of the additional five A320s, given that TAA should still be able to redeploy them to other profit-making routes or to other associates within the AirAsia group.

Key risks include world crisis (that includes war, terrorism and epidemics); a surge in jet fuel price; US dollar appreciation; weak air travel demand; and the high-speed train service between Singapore and Penang. 

Maintain “buy” with TP of RM3.30 based on unchanged 10% discount to sum-of-parts. — HLIB Research

This article first appeared in The Edge Financial Daily, on April 6, 2015.