Wednesday, May 25, 2011

Air Asia: Lower Passenger Yields; Higher Fuel Prices

25 May 2011
Price Target: RM3.40
Share price: RM3.06


Results
Below – 1Q11 results was below our expectations and concensus. 1Q11 core earnings was RM127.3m (+14.3% yoy; -62.6% qoq), achieving 13.4% of HLIB estimates and 15% of consensus.

Deviations
Lower than expected average ticket prices and average ancillary income.

Dividends
None.

Highlights
# 1Q2011 passenger yield (ticket sales/RPK) dropped by 11.1% qoq and 10.2% yoy to 14 sen and likely to sustain at the current level.

# 1Q2011 average ancillary income per passenger increased by 1.5% qoq and 31.2% yoy to RM49.9.

# Thai AirAsia and Indonesia AirAsia continued to post positive earnings in 1Q11. Loans to associates dropped further to RM263 million from RM380 million in previous quarter.

# Philippines AirAsia is expected to commence operation by 4Q2011 with 2 A320s, while Vietnam AirAsia to commence by 2Q2011. Singapore “night-stopping” is targeted to start by 3Q2011.

# Net gearing improved to 1.57x (1Q11) vs 1.75x (4Q10).

# Jet fuel hedged at 17% for 2H11 at average of US$124/bbl. Fuel surcharge will be continued despite jet fuel price dropped back to US$125/bbl.

# Strategies are being developed to further increase its ancillary income such as JV with Expedia, loyalty program and offering duty free products.

Risks
World crisis (ie. war, tourism and epidemic outbreak), delay in KLIA2 completion, prolong surge in jet fuel price and the development of high speed train between Singapore and Pulau Pinang.

Forecasts
Reduced FY11 earnings by 14.2% to reflect lower average passenger yield. Subsequently, FY12-13 earnings are cut by 10.6-10.9% respectively.

Rating
BUY

Positives:
- Beneficiary of strong air traffic into Malaysia, inline with government initiatives to boost tourism sectors.
- Largest and lowest cost LCC in Southeast Asia with strong brand name.
- Re-rating catalysts via IPO exercises of AirAsia X, Thai AirAsia and Indonesia AirAsia.
- Strong ancillary income.

Negatives
- Surging jet fuel cost.
- Potential price war between AirAsia and Firefly.

Valuation
Target Price cut to RM3.40 from RM3.80 (based on Sum-of- Parts), following the cut in forecast.


Source: HLeBroking

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