Highlights/ Comments

• Ministry of Transport (MoT) of Indonesia has issued a press statement to clarify the ministry measures towards airlines that fail to overturn their negative equity positions by End- July. These measures will not involve any suspension of operating permits.

• To recap, Indonesia AirAsia (IAA) has a negative equity position of IDR3tn (RM860m) and paid up capital of IDR180bn as at 1Q15. IAA would need further injection of at least RM1bn (including additional paid up capital of IDR320bn or RM90m).

• Should the airlines fail to meet the requirements by the deadline, MoT will take necessary precautions in order to ensure the airlines adhere to the existing law which includes: 1) Any new route request by the affected airlines will be closely reviewed and monitored by MoT (stringent new routes approval); 2) Affected airlines will have to present a well-defined plan to improve their equity position to MoT; and 3) MoT will assist and support the 13 airlines in improving their equity positions so that they are able to operate in line with the prevailing services and safety standards. (Although they did not elaborate on what kind of support or assistance they will give to affected airlines).

• We are positive on the announcement, which proved to support our view on the favorable outcome from the meeting between AirAsia Bhd (AAB) and MoT. Further, IAA had already lay out a detailed capital restructuring plan (increase share capital and issuance of convertible bonds by 2015; earnings turnaround by 2016; and IPO by 2017) to settle the outstanding borrowings/receivables to Air Asia.

• We are confident that IAA will be able to pull through this turbulence with promising forward bookings, rationalized market, and better capacity management, as well as strong support from the Indonesian government.

Risks

• World crisis (ie. War, terrorism and epidemic outbreak); surge in jet fuel price; US$ appreciation; weak air travel demand; and high speed train infrastructure between Singapore and Pulau Pinang.

Forecasts

• Unchanged

Rating

• Buy

Positives

• 1) Sustaining lowest cost LCC operator in Asia with largest network and strong brand name; 2) Low jet fuel price; 3) Increasing ancillary income; and 4) Routes rationalization of major competitor MAS.

Negatives

• 1) Higher cost of living faced by consumers (from GST implementation); and 2) Regional air-demand slowdown and political issues.

Valuation

• Maintained BUY and TP of RM3.11 based on unchanged 10% discount to SOP.

Source: Hong Leong Investment Bank Research - 10 Jul 2015