AirAsia announced its 2QFY15 preliminary operating statistics, with the Group reported an increase in traffic volume by 11.3% YoY (+5.2% QoQ) to 14.2bn revenue-passenger-kilometres (RPK), although its YoY load factor was flat at 79.0% (1QFY15: 76.9%). Last Friday, AirAsia also announced that it has served a letter of demand amounting to RM409m on Malaysia Airports Holdings Berhad (MAHB) and Malaysia Airports (Sepang) Sdn Bhd for the loss and damages incurred operating from klia2 and LCC Terminal. We are keeping our Outperform call on AirAsia, but at a lower target price of RM1.88 (previously RM2.53) as we cut our FY16F/17F EPS by 6%-7% due to weaker ringgit forecast and giving a 20%-discount to our 10x FY16F EPS, to account for the risk of further losses and unsuccessful fund raising exercise for its Indonesia associate (IAA) and unrecoverable debt from its associates.

Healthier 2QFY15 statistics. During 2QFY15, Malaysia AirAsia (MAA) had carried 5.95m passengers (+6.8% YoY) with seat capacity of 7.43m (+6.7% YoY). Available-seat-kilometres (ASK) increased to 9.1bn (+6.6% YoY) and revenue-passenger-kilometres (RPK) increased to 7.26bn (+6.8% YoY) due to a recovery demand from China on May onwards (Chart 2). AirAsia managed to keep its passenger load at 80% level in line with its same quarter in the previous years, up by 6.2ppts compared to its 1QFY15 (load factor at 75.4%). (Table 2)

Associates’ performance. Thailand AirAsia (TAA)'s load factor maintain at its 80% level on the back of passenger volume and capacity growth YoY increased by 26.1% and 23.1% respectively, showing an improvement in its political situation and tourism (Table 3). Indonesia AirAsia (IAA) remain challenging after QZ8501 incident. However, IAA reported a QoQ improvement with load factor of 72.7% in 2QFY15 (+3.8 ppts QoQ), due to its market leadership as the country's leading operator for the international route as well as its successful rationalisation strategies (Table 4). Meanwhile, Philippines AirAsia (PAA) reported 976,381 passengers carried in 2QFY15 (+5.7% YoY) and achieved a load factor at 80% level. AirAsia India (AAI) also did not disappoint with the passengers growth of +27.2% QoQ and load factor of 82.8%, due to route frequencies added and new routes introduction.

Details on letter of demand. We understand the demand was the result of a breached of MAHB contractual duties as well as the damaged to AirAsia's brand and reputation being the single largest operator of klia2. The announcement came in after several news circulated recently regarding the sinking problem at klia2. It is too premature to assess the value of the damage, hence we did not include this in our earnings estimate.

Maintain outperform. At this current share price, AirAsia is currently trading at an attractive valuation of 6x FY16F earnings, at its lowest historical PER (Chart 1). We anticipate AirAsia to benefit from lower fuel prices, more rational market from MAS restructuring as well as solid long term potential growth prospects and low cost competitive advantage.

Source: PublicInvest Research - 3 Aug 2015