Highlights / Comments

• Management guided positive outlook for AirAsia group with great potentials in leveraging into Asian two biggest and most populous countries - China and India, which currently contribute to 19% and 3% respectively to revenue. AirAsia is also looking into potential JV opportunity in Vietnam.

• Fleet expansion is expected to commence by 2017 until 2028, with an average of 19-20 aircrafts per annum i.e. 411 aircrafts by 2028 (currently 178 aircrafts). New deliveries of A320NEO (15% fuel saving) will start in Sep 2016 and A321NEO (20% fuel saving) will be in 2019.

• Management is seeing a more rational market condition in all the countries (especially Malaysia), which will not put competitive pressure on its yields in 2H16 and 2017. Load factor in 3Q16 is expected to be stronger than 1H16.

• IAA (Indonesia) and Philippines (PAA) are expected to show turnarounds in 2H16 as both restructuring efforts are bearing fruits. IAA continues to focus on international routes (cutting unprofitable domestic routes) and PAA continues to renew its fleets (from Zest Airways) and focus on North Asia segment. Turnaround and IPO strategies remain on track.

• Potential diversification of AAC by 2017 is a strong catalyst for AirAsia, given AAC is valued at RM4.1bn (vs. AirAsia’s market capital of RM8.3bn). Nevertheless, AirAsia is expected to hold 20-30% stake in AAC. Proceeds from the divestment will potentially be distributed to shareholders, translating to 86-98sen/share (28.8-32.8% dividend yield).

• The distribution is on top of higher normal dividend of 13.2sen/share (4.4% dividend yield) for 2016.

Risks

• World crisis (i.e. war, terrorism and epidemic outbreak), shutdown of KLIA2, surge in jet fuel price and high speed train infrastructure between Singapore and P. Pinang.

Forecasts

• Unchanged.

Rating

• BUY

• Positives – 1) Beneficiary of strong air traffic into Malaysia, in line with government initiatives to boost tourism sectors; 2) Largest and lowest cost LCC in Asia with strong brand name; 3) Low jet fuel price; and 4) Strong ancillary income.

• Negatives – 1) Strengthened US$; and 2) Continued losses from associates IAA and PAA.

Valuation

• Reiterate our BUY recommendation with unchanged TP of RM3.85 based on unchanged 10% discount to SOP. We remain positive on AirAsia’s outlook given the sustainable yield trend (on disciplined capacity growth & strong load factor) and stable jet fuel prices (hedged 74% requirement of 2H16 and 40% of 2017 at US$ 55-58/bbl).

Source: Hong Leong Investment Bank Research - 16 Aug 2016