Tuesday, July 12, 2011

AirAsia: Regional Largest LCC Player

13 July 2011
Price Target: RM4.24
Share price: RM3.47

# Continued strong May operating data:
- AirAsia Bhd: ASK +8.1%; RPK +20.8%; LF 80.3%.
- Thai AirAsia: ASK +24.5%; RPK +41.3%; LF 80.1%.
- Indo AirAsia: ASK +38.1%; RPK +33.1%; LF 72.7%.
- Thai AirAsia and Indo AirAsia IPOs on track by end 2011.

# AirAsia placed orders for 200 A320 NEO, ensuring capacity growth, young fleet and low operating cost.

# AirAsia X gaining momentum.

# The demand for air travel is expected to be healthy in line with the rising affluence and increasing popularity of regional travelling as well as the availability of budget travelling packages.

# The high load factor indicates good capacity management and better profitability (higher margins with lower cost/RPK).

# Potential re-rating from Thai AirAsia and Indo AirAsia IPOs, which has combined value of 73sen/share. Both units are currently carried at zero cost in AirAsia’s book. New aircrafts orders increase the urgency to list both unites as long term solution to aircrafts financing and financial independent.

# AirAsia will continue to be Southeast Asia largest LCC player with lowest operating cost, with AirAsia X serving as inter-regional LCC.

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

After accounting for reduced aircraft delivery for Malaysia operation, we have cut our FY11E earnings by 6.7%, and FY12-13E by 9.4-12.0%, However, 2-years EPS CGAR would still be strong at +18.6% pa.

Rating - BUY
- 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.

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

We roll forward our valuation into 10x FY12E (10% discount to peers valuation). Target Price increase to RM4.24 from RM3.40 based on Sum-of-Parts, to better reflect AirAsia’s valuation post IPO exercises of associates and investment.

Source: HLIB Research

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