Highlights/ Comments

• AirAsia has recently announced a pleasing final dividend of 12sen/share following its record high profits of RM2.0bn (core profits of RM1.8bn) in FY16. The dividend payout represents 3.9% yield (based on RM3.04 share price).

• We reckon there is a high possibility of AirAsia announcing another special dividend following the monetizing of its assets - AAC (US$1.0-1.2bn/RM4.4-5.3bn ), Expedia (US$86m/RM378.4m) and AACOE (RM250m ) within FY17. The total potential proceeds from the disposals are RM5.0- 5.9bn (translating into RM1.49-1.75/share).
   
• Tender submission for AAC has closed by end March and currently under evaluation stage. We expect AirAsia to maintain 20-30% share in AAC . Management has indicated the proceeds to be used for special dividend distribution and debt repayments (further improve gearing on top of deconsolidation of AAC).
   
• In 1Q17, there was a slight 0.3% yoy drop in KLIA2 pax traffic due to Malindo moved its operation into KLIA-MTB since mid-March 2016. Excluding Malindo, the normalized growth of KLIA2 was +9.2% yoy , reflecting continued healthy growth of AirAsia operation in 1Q17 .
   
• Furthermore, the higher growth of +10.5% yoy pax traffic vs. +3.5% yoy aircraft traffic in Malaysia Airports in 1Q17, indicating improvement in overall pax load factor. Hence, we expect AirAsia to have maintained high load factor of above 85% (AirAsia Malaysia reported 85-89% load factor in 1Q-4Q16) and achieved higher operational efficiency .
   
• We opine that concerns on higher jet fuel prices and weak RM are over-played , given AirAsia has hedged 75% of fuel requirement at US$60/bbl and 65% of US$ borrowings. Moreover, RM has shown stabilization with bias of strengthening . Management has guided that AirAsia earnings is sustainable due to improving load factor and operational efficiency as well as higher revenue.

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 Penang.

Forecasts

• We have updated our forecasts by -7.0% for FY17E and +1.3% for FY18F. We also introduced FY19F at RM1.85bn (+3.6% yoy). We have not taken into account of the assets disposals, which contribute circa RM500m per annum.

Rating

BUY

• Despite the concerns on weakened RM and higher jet fuel price, AirAsia earnings is sustainable from the strong capacity expansion, high load factors and low jet fuel costs. Asset monetization and JV/Associates IPO exercises in 2017 will further enhance AirAsia’s valuation.

Valuation

• Reiterate our BUY recommendation with higher TP of RM3.82 (from RM3.60) based on unchanged 10% discount to SOP, after we roll forward our valuation into FY18F. We have not accounted for the valuation from monetization of assets, which will increase our valuation to RM4.10.

Source: Hong Leong Investment Bank Research - 18 Apr 2017