Tuesday, May 3, 2011

AirAsia Review: Healthy Associates; Fuel Surcharge

3 May 2011
Price Target: RM3.80
Share price: RM2.87


Highlights
# Indonesia and Thai AirAsia is registering healthy operational growth with strong market demand.

# Both IAA and TAA are targeted to list by end 2011.

# Re-imposing fuel surcharge to offset high jet fuel cost.

# Appreciation of RM, to provide cushion on the surge of jet fuel prices, as well as boosting air travel demand.

# Declared net dividend payout of 2.8 sen (1% net yield).

Catalysts
# Continued strong air travel demand and the removal of FisKal tax by Indonesia government will boost the demand for AirAsia Group flights, increasing passenger yields.

# Strong load factor to boost AirAsia Group profitability through higher aircraft utilization and efficiency, reducing overall unit costs, thus improving overall margins.

# Potential listing of AirAsia X, TAA and IAA by 2H11-12 will be the key re-rating catalyst. Total investment values post listing is expected to be ~RM1.3bn or 47.2sen/share. TAA and IAA are currently carried at zero cost in AirAsia’s book.

# Fuel surcharge will improve its overall profitability. Expect AirAsia to recoup RM164 million for FY11e from fuel surcharge.

# Expect AirAsia to maintain dividend payout in future due to strong cash flow especially after listing of IAA and TAA.

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


Forecasts
Increased FY11E earnings by 9.7% due to higher load factor, fare prices and ancillary income as well as fuel surcharge implementation to offset the higher jet fuel prices. FY12-13E earnings have also been raised by 15-20%.

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 and introduction of fuel surcharge.

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

Valuation
Target Price raised to RM3.80 (from RM3.50) after accounting for stronger earnings. Valuation is based on Sum-of-Parts, to better reflect AirAsia’s valuation post IPO
exercises of associates and investment.


Source: HLeBroking

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